[Federal Register Volume 61, Number 169 (Thursday, August 29, 1996)]
[Rules and Regulations]
[Pages 45476-45637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21589]



[[Page 45475]]


_______________________________________________________________________

Part II





Federal Communications Commission





_______________________________________________________________________



47 CFR Parts 1, 20, 51, and 90



Implementation of the Local Competition Provisions in the 
Telecommunications Act of 1996; Interconnection Between Local Exchange 
Carriers and Commercial Mobile Radio Service Providers; Implementation 
of Sections 3(n) and 332 of the Communications Act; Final Rule

  Federal Register / Vol. 61, No. 169, Thursday, August 29, 1996 / 
Rules and Regulations  

[[Page 45476]]



FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 1, 20, 51 and 90

[CC Docket No. 96-98, CC Docket No. 95-185, GN Docket No. 93-252; FCC 
96-325]


Implementation of the Local Competition Provisions in the 
Telecommunications Act of 1996; Interconnection between Local Exchange 
Carriers and Commercial Mobile Radio Service Providers; Implementation 
of Sections 3(n) and 332 of the Communications Act

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Report and Order released August 8, 1996 promulgates 
national rules and regulations implementing the statutory requirements 
of the Telecommunications Act of 1996 (the 1996 Act) intended to 
encourage the development of competition in local exchange and exchange 
access markets. The Report and Order adopts certain national rules that 
are consistent with the terms and goals of the 1996 Act and adopts 
minimum requirements which states may augment with their own 
requirements that are consistent with the 1996 Act and the Commission's 
rules thereunder. The Report and Order also incorporates and resolves 
issues regarding interconnection between CMRS providers and LECs, which 
initially were raised in a separate docket. The Report and Order 
enables the states and the Commission to begin implementing the local 
competition provisions of the 1996 Act.

EFFECTIVE DATE: September 30, 1996.

FOR FURTHER INFORMATION CONTACT: Lisa Gelb, Attorney, Common Carrier 
Bureau, Policy and Program Planning Division, (202) 418-1580, or David 
Sieradzki, Attorney, Common Carrier Bureau, Competitive Pricing 
Division, (202) 418-1520. For additional information concerning the 
information collections contained in this Report and Order contact 
Dorothy Conway at 202-418-0217, or via the Internet at [email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report 
and Order adopted August 1, 1996, and released August 8, 1996. The full 
text of this Report and Order is available for inspection and copying 
during normal business hours in the FCC Reference Center (Room 239), 
1919 M St., NW., Washington, DC. The complete text also may be obtained 
through the World Wide Web, at http://www.fcc.gov/Bureaus/Common 
Carrier/Orders/fcc96325.wp, or may be purchased from the Commission's 
copy contractor, International Transcription Service, Inc., (202) 857-
3800, 2100 M St., NW., Suite 140, Washington, DC 20037. Pursuant to the 
Telecommunications Act of 1996, the Commission released a Notice of 
Proposed Rulemaking, Implementation of the Local Competition Provisions 
of the Telecommunications Act of 1996, CC Docket No. 96-98 (61 FR 18311 
(April 25, 1996)) to seek comment on rules to implement sections 251, 
252 and 253 of the 1996 Act.

General

    Section 251 of the 1996 Act imposes specific obligations on 
telecommunications carriers designed to promote competition in local 
exchange markets across the country. Section 251(a) imposes general 
obligations on all telecommunications carriers. Section 251(b) imposes 
on all LECs certain requirements, including the obligation to provide 
resale, access to rights-of-way, and to establish reciprocal 
compensation arrangements for transport and termination of traffic. 
Section 251(c) requires incumbent LECs to make available to new 
entrants interconnection and access to unbundled network elements, and 
to offer LEC retail services for resale to telecommunications carriers 
at wholesale rates. Access to unbundled elements and resale 
opportunities are methods by which telecommunications carriers can 
enter the local exchange market.

Interconnection

    Section 251(c)(2) of the 1996 Act requires incumbent LECs to 
provide interconnection to any requesting telecommunications carrier at 
any technically feasible point. The interconnection must be at least 
equal in quality to that provided by the incumbent LEC to itself or its 
affiliates, and must be provided on rates, terms, and conditions that 
are just, reasonable, and nondiscriminatory. The term 
``interconnection'' under section 251(c)(2) refers only to the physical 
linking of two networks for the mutual exchange of traffic. The 
Commission identifies a minimum set of ``technically feasible'' points 
of interconnection: (1) the line-side of a local switch; (2) the trunk-
side of a local switch; (3) the trunk interconnection points for a 
tandem-switch; (4) central office cross-connect points; and (5) out-of-
band signaling transfer points. In addition, the points of access to 
unbundled elements are also technically feasible points of 
interconnection. The Commission states that telecommunications carriers 
may request interconnection under section 251(c)(2) to provide 
telephone exchange service or exchange access service, or both. If the 
request is for such purposes, the incumbent LEC must provide 
interconnection in accordance with section 251(c)(2) and the 
Commission's rules thereunder to any telecommunications carrier, 
including interexchange carriers and commercial mobile radio service 
(CMRS) providers.

Access to Unbundled Elements

    Section 251(c)(3) requires incumbent LECs to provide requesting 
telecommunications carriers nondiscriminatory access to network 
elements on an unbundled basis at any technically feasible point on 
rates, terms, and conditions that are just, reasonable, and 
nondiscriminatory. The Commission identifies a minimum set of network 
elements that incumbent LECs must provide under this section. States 
may require incumbent LECs to provide additional network elements on an 
unbundled basis. The Commission identified the seven following network 
elements: network interface devices, local loops, local and tandem 
switches (including all software features provided by such switches), 
interoffice transmission facilities, signalling and call-related 
database facilities, operations support systems and information and 
operator and directory assistance facilities. Incumbent LECs must 
provide requesting carriers nondiscriminatory access to operations 
support systems and information. The Order requires incumbent LECs to 
provide access to network elements in a manner that allows requesting 
carriers to combine such elements as they choose. Incumbent LECs may 
not impose restrictions upon the use of network elements.

Methods of Obtaining Interconnection and Access to Unbundled 
Elements

    Section 251(c)(6) requires incumbent LECs to provide physical 
collocation of equipment necessary for interconnection or access to 
unbundled network elements at the incumbent LEC's premises, except that 
the incumbent LEC may provide virtual collocation if it demonstrates to 
the state commission that physical collocation is not practical for 
technical reasons or because of space limitations. Incumbent LECs are 
required to provide any technically feasible method of interconnection 
or access requested by a telecommunications carrier, including

[[Page 45477]]

physical collocation, virtual collocation, and interconnection at meet 
points. The Commission adopts, with certain modifications, the physical 
and virtual collocation requirements it adopted earlier in the Expanded 
Interconnection proceeding. The Commission also establishes rules 
interpreting the requirements of section 251(c)(6).

Pricing Methodologies

    The 1996 Act requires the states to set prices for interconnection 
and unbundled elements that are cost-based, nondiscriminatory, and may 
include a reasonable profit. To help the states accomplish this, the 
Commission has concluded that the state commissions should set 
arbitrated rates for interconnection and access to unbundled elements 
pursuant a forward-looking economic cost pricing methodology. The 
Commission has concluded that the prices that new entrants pay for 
interconnection and unbundled elements should be based on the local 
telephone companies Total Element Long-Run Incremental Cost (TELRIC) of 
providing a particular network element, plus a reasonable share of 
forward-looking joint and common costs. States will determine, among 
other things, the appropriate risk-adjusted cost of capital and 
depreciation rates. If states are unable to conduct a cost study and 
apply an economic costing methodology within the statutory time frame 
for arbitrating interconnection disputes, the Commission has 
established default ceilings and ranges for the states to apply, on an 
interim basis, to interconnection arrangements. The Commission 
establishes a default range of 0.2-0.4 cents per minute for switching, 
plus access charges as discussed below. For tandem switching, the 
Commission establishes a default ceiling of 0.15 cents per minute. The 
Order also will establish default ceilings for the other unbundled 
network elements. These default provisions might provide an 
administratively simpler approach for state establishment of prices, 
for a limited interim period, and states, in the exercise of their 
discretion, select the specific price within that range, or subject to 
that ceiling.

Access Charges for Unbundled Switching

    Nothing in the Commission's Order alters the collection of access 
charges paid by an interexchange carrier under Part 69 of the 
Commission's rules, when the incumbent LEC provides exchange access 
service to an interexchange carrier, either directly or through service 
resale. Because access charges are not included in the cost-based 
prices for unbundled network elements, and because certain portions of 
access charges currently support the provision of universal service, 
until the access charge reform and universal service proceedings have 
been completed, the Commission is continuing to provide for access 
charge recovery with respect to use of an incumbent LEC's unbundled 
switching element, for a defined period of time. This will minimize the 
possibility that the incumbent LEC will be able to ``double recover,'' 
through access charges, the facility costs that new entrants have 
already paid to purchase unbundled elements, while preserving the 
status quo with respect to subsidy payments. Under this Order, 
incumbent LECs will recover from interconnecting carriers the carrier 
common line charge and a charge equal to 75% of the transport 
interconnection charge for all interstate minutes traversing the 
incumbent LECs local switches for which the interconnecting carriers 
pay unbundled network element charges. This aspect of the Order expires 
at the earliest of: 1) June 30, 1997; 2) issuance of final decisions by 
the Commission in the universal service and access reform proceedings; 
or 3) if the incumbent LEC is a Bell Operating Company (BOC), the date 
on which that BOC is authorized under section 271 of the Act to provide 
in-region interLATA service, for any given state.

Resale

    The 1996 Act requires all incumbent LECs to offer for resale any 
telecommunications service that the carrier provides at retail to 
subscribers who are not telecommunications carriers. Resale will be an 
important entry strategy both in the short term for many new entrants 
as they build out their own facilities and for small businesses that 
cannot afford to compete in the local exchange market by purchasing 
unbundled elements or by building their own networks. The 1996 Act's 
pricing standard for wholesale rates requires state commissions to 
identify what marketing, billing, collection, and other costs will be 
avoided or that are avoidable by incumbent LECs when they provide 
services wholesale, and calculate the portion of the retail rates for 
those services that is attributable to the avoided and avoidable costs. 
To define clearly a wholesale service, the Commission has identified 
certain avoided costs. The application of this definition is left to 
the states. If a state elects not to implement the methodology, it may 
elect, on an interim basis, a discount rate from within a default range 
of discount rates established by the Commission. The Commission 
establishes a default discount range of 17-25% off retail prices, 
leaving the states to set the specific rate within that range, in the 
exercise of their discretion.

Transport and Termination

    The 1996 Act requires that charges for transport and termination of 
traffic be cost-based. The Commission concludes that state commissions, 
during arbitrations, should set symmetrical prices based on the local 
telephone company's forward-looking costs. The state commissions would 
also use the TELRIC methodology when establishing rates for transport 
and termination. The Commission establishes a default range of 0.2-0.4 
cents per minute for end office termination for states which have not 
conducted a TELRIC cost study. The Commission finds significant 
evidence in the record in support of the lower end of the ranges. In 
addition, the Commission finds that additional reciprocal charges could 
apply to termination through a tandem switch. The default ceiling for 
tandem switching is 0.15 cents per minute, plus applicable charges for 
transport from the tandem switch to the end office. Each state opting 
for the default approach for a limited period of time, may select a 
rate within that range.

Commercial Mobile Radio Service

    In the Order, the Commission concludes that CMRS providers are 
telecommunications carriers, and therefore are entitled to reciprocal 
compensation arrangements under section 251(b)(5). The Commission also 
concludes that under section 251(b)(5) a LEC may not charge a CMRS 
provider, including a paging company, or any other carrier for 
terminating LEC-originated traffic. The Commission also states that 
CMRS providers (specifically cellular, broadband PCS, and covered 
specialized mobile radio (SMR) providers) offer telephone exchange 
services, and such providers therefore may request interconnection 
under section 251(c)(2). The Commission determines that CMRS providers 
should not be classified as LECs at this time. In this decision, the 
Commission applied sections 251 and 252 to LEC-CMRS interconnection. 
The Commission acknowledges that section 332 is also a basis for 
jurisdiction over LEC-CMRS interconnection, but declined to define the 
precise extent of that jurisdiction at this time.

[[Page 45478]]

Access to Rights of Way

    The Commission also amends its rules to implement the pole 
attachment provisions of the 1996 Act. Specifically, the Commission 
establishes procedures for nondiscriminatory access by cable television 
systems and telecommunications carriers to poles, ducts, conduits, and 
rights-of-way owned by utilities or LECs. The Order includes several 
specific rules as well as a number of more general guidelines designed 
to facilitate the negotiation and mutual performance of fair, pro-
competitive access agreements without the need for regulatory 
intervention. Additionally, an expedited dispute resolution is provided 
when good faith negotiations fail, as are requirements concerning 
modifications to poles, ducts, conduits, and rights-of-way and the 
allocation of the costs of such modifications.

Exemptions, Suspensions, and Modifications of Section 251 Requirements 
for Rural and Small Telephone Companies

    Section 251(f)(1) of the 1996 Act provides for exemption of the 
requirements in section 251(c) for rural telephone companies (as 
defined by the 1996 Act) under certain circumstances. Section 251(f)(2) 
permits LECs with fewer than 2 percent of the nation's subscriber lines 
to petition for suspension or modification of the requirements in 
sections 251(b) or (c).
    States are primarily responsible for interpreting the provisions of 
section 251(f) through rulemaking and adjudicative proceedings, and are 
responsible for determining whether a LEC in a particular instance is 
entitled to exemption, suspension, or modification of section 251 
requirements.
    The Commission establishes a very limited set of rules interpreting 
the requirements of section 251(f):

--LECs bear the burden of proving to the state commission that a 
suspension or modification of the requirements of section 251(b) or (c) 
is justified.
--Rural LECs bear the burden of proving that continued exemption of the 
requirements of section 251(c) is justified, once a bona fide request 
has been made by a carrier under to section 251.
--Only LECs that, at the holding company level, have fewer than 2 
percent of the nation's subscriber lines are entitled to petition for 
suspension or modification of requirements under section 251(f)(2).

Regulatory Flexibility Analysis

    As required by the Regulatory Flexibility Act, the Report and Order 
contains a Final Regulatory Flexibility Analysis which is set forth in 
Appendix C to the Report and Order. A brief description of the analysis 
follows.
    Pursuant to Section 604 of the Regulatory Flexibility Act, the 
Commission performed a comprehensive analysis of the Report and Order 
with regard to small entities and small incumbent LECs. This analysis 
includes: (1) a succinct statement of the need for, and objectives of, 
the Commission's decisions in the Report and Order; (2) a summary of 
the significant issues raised by the public comments in response to the 
initial regulatory flexibility analysis, a summary of the Commission's 
assessment of these issues, and a statement of any changes made in the 
Report and Order as a result of the comments; (3) a description of and 
an estimate of the number of small entities and small incumbent LECs to 
which the Report and Order will apply; (4) a description of the 
projected reporting, recordkeeping and other compliance requirements of 
the Report and Order, including an estimate of the classes of small 
entities and small incumbent LECs which will be subject to the 
requirement and the type of professional skills necessary for 
compliance with the requirement; (5) a description of the steps the 
Commission has taken to minimize the significant economic impact on 
small entities and small incumbent LECs consistent with the stated 
objectives of applicable statutes, including a statement of the 
factual, policy, and legal reasons for selecting the alternative 
adopted in the Report and Order and why each one of the other 
significant alternatives to each of the Commission's decisions which 
affect the impact on small entities and small incumbent LECs was 
rejected.
    The rules adopted in this Report and Order are necessary to 
implement the provisions of the Telecommunications Act of 1996.

Paperwork Reduction Act

    Public reporting burden for the collection of information is 
estimated as follows:
    OMB Approval Number: 3060-0710.
    Title: Policy and rules concernng the implementation of the local 
competition provisions in the Telecommunications Act of 1996.
    Form No.: N/A.
    Type of Review: New collection.

------------------------------------------------------------------------
                                                Annual hour     Total   
                                      No. of     burden per     annual  
      Information collection       respondents    response      burden  
                                     (approx.)    (hours)      (hours)  
------------------------------------------------------------------------
Submission of information                                               
 necessary to reach agreement....           51          500       25,500
Submission of agreements to the                                         
 state commission................  ...........  ...........          835
    New and modified.............           51            5             
    Class A carrier..............           16            5             
    Other preexisting............          500            1             
    Burden of proof regarding                                           
     interconnection and access                                         
     to unbundled network                                               
     elements....................          100          250       25,000
Collocation......................          100          250       25,000
Notification that state                                                 
 commission has failed to act....           30            1           30
Rural and small carriers.........          500           10        5,000
Pole attachment modifications:                                          
 private electric utilities and                                         
 telephone utilities.............        1,400          375      525,000
Maintenance practices                                                   
 modifications: cable operators,                                        
 utilities and others............       12,250           .5        6,125
Pole attachment access requests..        2,500            1        2,500
Pole attachment denials of access          250            3          750
Dispute resolution process for                                          
 denials of access: using in-                                           
 house assistance................          250           25        6,250
Dispute resolution process for                                          
 denials of access: using outside                                       
 legal counsel...................          250            4        1,000
Preparation of forward-looking                                          
 economic cost studies to                                               
 determine rates for                                                    
 interconnection and unbundled                                          
 network elements during                                                
 arbitration proceedings.........          100        1,216      121,600
Preparation of a cost study on                                          
 avoidable costs to determine                                           
 resale discounts................          200          480       96,000
Preparation of forward-looking                                          
 economic cost studies to                                               
 determine reciprocal rates for                                         
 transport and termination of                                           
 telecommunications traffic......          100        1,216      121,600

[[Page 45479]]

                                                                        
Measurement of traffic for                                              
 purposes of determining whether                                        
 transport and termination                                              
 traffic flows are symmetrical...          550          700      385,000
Filing required for arbitration..          200            2          400
Determination of rates for                                              
 interconnection, unbundled                                             
 network elements, and transport                                        
 and termination of                                                     
 telecommunications traffic--                                           
 state commission review of                                             
 forward-looking economic cost                                          
 studies.........................           50        2,160      108,000
Determination of resale discount                                        
 percentage--state commission                                           
 review of avoided cost studies..           50          640       32,000
Petition for incumbent LEC status           30            1           30
Use of proxies by state                                                 
 commissions--articulating                                              
 written reasons for choice......           50          120        6,000
Preparation of forward-looking                                          
 economic cost studies to                                               
 establish rates for transport                                          
 and termination for paging and                                         
 radiotelephone service,                                                
 narrowband personal                                                    
 communications services, and                                           
 paging operation in the private                                        
 land mobile radio services......           50          720       36,000
------------------------------------------------------------------------

    Total Annual Burden: 1,529,620 hours.
    Respondents: Business or other for-profit.
    Estimated costs per respondent: $0.
    Needs and Uses: The Report and Order implements parts of section 
251 of the Telecommunications Act requiring that: incumbent local 
exchange carriers (LECs) offer interconnection, unbundled network 
elements, transport and termination, and wholesale rates for retail 
services to new entrants; incumbent LECs price such services at rates 
that are cost-based and just and reasonable; and incumbent LECs provide 
access to rights-of-way, as well as establish reciprocal compensation 
arrangements for the transport and termination of telecommunications 
traffic.

Synopsis of First Report and Order

I. Introduction, Overview, and Executive Summary

A. The Telecommunications Act of 1996--A New Direction

    1. The Telecommunications Act of 1996, (Telecommunications Act of 
1996, Public Law No. 104-104, 110 Stat. 56, to be codified at 47 U.S.C. 
Secs. 151 et seq. Hereinafter, all citations to the 1996 Act will be to 
the 1996 Act as codified in the United States Code), fundamentally 
changes telecommunications regulation. In the old regulatory regime 
government encouraged monopolies. In the new regulatory regime, we and 
the states remove the outdated barriers that protect monopolies from 
competition and affirmatively promote efficient competition using tools 
forged by Congress. Historically, regulation of this industry has been 
premised on the belief that service could be provided at the lowest 
cost to the maximum number of consumers through a regulated monopoly 
network. State and federal regulators devoted their efforts over many 
decades to regulating the prices and practices of these monopolies and 
protecting them against competitive entry. The 1996 Act adopts 
precisely the opposite approach. Rather than shielding telephone 
companies from competition, the 1996 Act requires telephone companies 
to open their networks to competition.
    2. The 1996 Act also recasts the relationship between the FCC and 
state commissions responsible for regulating telecommunications 
services. Until now, we and our state counterparts generally have 
regulated the jurisdictional segments of this industry assigned to each 
of us by the Communications Act of 1934. The 1996 Act forges a new 
partnership between state and federal regulators. This arrangement is 
far better suited to the coming world of competition in which 
historical regulatory distinctions are supplanted by competitive 
forces. As this Order demonstrates, we have benefitted enormously from 
the expertise and experience that the state commissioners and their 
staffs have contributed to these discussions. We look forward to the 
continuation of that cooperative working relationship in the coming 
months as each of us carries out the role assigned by the 1996 Act.
    3. Three principal goals established by the telephony provisions of 
the 1996 Act are: (1) opening the local exchange and exchange access 
markets to competitive entry; (2) promoting increased competition in 
telecommunications markets that are already open to competition, 
including the long distance services market; and (3) reforming our 
system of universal service so that universal service is preserved and 
advanced as the local exchange and exchange access markets move from 
monopoly to competition. In this rulemaking and related proceedings, we 
are taking the steps that will achieve the pro-competitive, 
deregulatory goals of the 1996 Act. The Act directs us and our state 
colleagues to remove not only statutory and regulatory impediments to 
competition, but economic and operational impediments as well. We are 
directed to remove these impediments to competition in all 
telecommunications markets, while also preserving and advancing 
universal service in a manner fully consistent with competition.
    4. These three goals are integrally related. Indeed, the 
relationship between fostering competition in local telecommunications 
markets and promoting greater competition in the long distance market 
is fundamental to the 1996 Act. Competition in local exchange and 
exchange access markets is desirable, not only because of the social 
and economic benefits competition will bring to consumers of local 
services, but also because competition eventually will eliminate the 
ability of an incumbent local exchange carrier to use its control of 
bottleneck local facilities to impede free market competition. Under 
section 251, incumbent local exchange carriers (LECs), including the 
Bell Operating Companies (BOCs), are mandated to take several steps to 
open their networks to competition, including providing 
interconnection, offering access to unbundled elements of their 
networks, and making their retail services available at wholesale rates 
so that they can be resold. Under section 271, once the BOCs have taken 
the necessary steps, they are allowed to offer long distance service in 
areas where they provide local telephone service, if we find that entry 
meets the specific statutory requirements and is consistent with the 
public interest. Thus, under the 1996 Act, the opening of one of the 
last monopoly bottleneck strongholds in telecommunications--the local 
exchange and exchange access markets--to competition is intended to 
pave the way for enhanced competition in all telecommunications 
markets, by allowing all providers to enter all

[[Page 45480]]

markets. The opening of all telecommunications markets to all providers 
will blur traditional industry distinctions and bring new packages of 
services, lower prices and increased innovation to American consumers. 
The world envisioned by the 1996 Act is one in which all providers will 
have new competitive opportunities as well as new competitive 
challenges.
    5. The Act also recognizes, however, that universal service cannot 
be maintained without reform of the current subsidy system. The current 
universal service system is a patchwork quilt of implicit and explicit 
subsidies. These subsidies are intended to promote telephone 
subscribership, yet they do so at the expense of deterring or 
distorting competition. Some policies that traditionally have been 
justified on universal service considerations place competitors at a 
disadvantage. Other universal service policies place the incumbent LECs 
at a competitive disadvantage. For example, LECs are required to charge 
interexchange carriers a Carrier Common Line charge for every minute of 
interstate traffic that any of their customers send or receive. This 
exposes LECs to competition from competitive access providers, which 
are not subject to this cost burden. Hence, section 254 of the Act 
requires the Commission, working with the states and consumer advocates 
through a Federal/State Joint Board, to revamp the methods by which 
universal service payments are collected and disbursed. Federal-State 
Joint Board on Universal Service, CC Docket No. 96-45, Notice of 
Proposed Rulemaking and Order Establishing Joint Board, FCC 96-93, 61 
FR 10499 (March 14, 1996) (Universal Service NPRM). The present 
universal service system is incompatible with the statutory mandate to 
introduce efficient competition into local markets, because the current 
system distorts competition in those markets. For example, without 
universal service reform, facilities-based entrants would be forced to 
compete against monopoly providers that enjoy not only the technical, 
economic, and marketing advantages of incumbency, but also subsidies 
that are provided only to the incumbents.

B. The Competition Trilogy: Section 251, Universal Service Reform and 
Access Charge Reform

    6. The rules that we adopt to implement the local competition 
provisions of the 1996 Act represent only one part of a trilogy. In 
this Report and Order, we adopt initial rules designed to accomplish 
the first of the goals outlined above--opening the local exchange and 
exchange access markets to competition. The steps we take today are the 
initial measures that will enable the states and the Commission to 
begin to implement sections 251 and 252. Given the dynamic nature of 
telecommunications technology and markets, it will be necessary over 
time to review proactively and adjust these rules to ensure both that 
the statute's mandate of competition is effectuated and enforced, and 
that regulatory burdens are lifted as soon as competition eliminates 
the need for them. Efforts to review and revise these rules will be 
guided by the experience of states in their initial implementation 
efforts.
    7. The second part of the trilogy is universal service reform. In 
early November, the Federal/State Universal Service Joint Board, 
including three members of this Commission, will make its 
recommendations to the Commission. These recommendations will serve as 
the cornerstone of universal service reform. The Commission will act on 
the Joint Board's recommendations and adopt universal service rules not 
later than May 8, 1997, and, we hope, even earlier. Our universal 
service reform order, consistent with section 254, will rework the 
subsidy system to guarantee affordable service to all Americans in an 
era in which competition will be the driving force in 
telecommunications. By reforming the collection and distribution of 
universal service funds, the states and the Commission will also ensure 
that the goals of affordable service and access to advanced services 
are met by means that enhance, rather than distort, competition. 
Universal service reform is vitally connected to the local competition 
rules we adopt today.
    8. The third part of the trilogy is access charge reform. It is 
widely recognized that, because a competitive market drives prices to 
cost, a system of charges which includes non-cost based components is 
inherently unstable and unsustainable. It also well-recognized that 
access charge reform is intensely interrelated with the local 
competition rules of section 251 and the reform of universal service. 
We will complete access reform before or concurrently with a final 
order on universal service.
    9. Only when all parts of the trilogy are complete will the task of 
adjusting the regulatory framework to fully competitive markets be 
finished. Only when our counterparts at the state level complete 
implementing and supplementing these rules will the complete blueprint 
for competition be in place. Completion of the trilogy, coupled with 
the reduction in burdensome and inefficient regulation we have 
undertaken pursuant to other provisions of the 1996 Act, will unleash 
marketplace forces that will fuel economic growth. Until then, 
incumbents and new entrants must undergo a transition process toward 
fully competitive markets. We will, however, act quickly to complete 
the three essential rulemakings. We intend to issue a notice of 
proposed rulemaking in 1996 and to complete the access charge reform 
proceeding concurrently with the statutory deadline established for the 
section 254 rulemaking. This timetable will ensure that actions taken 
by the Joint Board in November and this Commission by not later than 
May 1997 in the universal service reform proceeding will be coordinated 
with the access reform docket.

C. Economic Barriers

    10. As we pointed out in our Notice of Proposed Rulemaking in this 
docket, Implementation of the Local Competition Provisions of the 
Telecommunications Act of 1996, CC Docket No. 96-98, Notice of Proposed 
Rulemaking, FCC 96-182 (April 19, 1996), 61 FR 18311 (April 25, 1996) 
(NPRM), the removal of statutory and regulatory barriers to entry into 
the local exchange and exchange access markets, while a necessary 
precondition to competition, is not sufficient to ensure that 
competition will supplant monopolies. An incumbent LEC's existing 
infrastructure enables it to serve new customers at a much lower 
incremental cost than a facilities-based entrant that must install its 
own switches, trunking and loops to serve its customers. Furthermore, 
absent interconnection between the incumbent LEC and the entrant, the 
customer of the entrant would be unable to complete calls to 
subscribers served by the incumbent LEC's network. Because an incumbent 
LEC currently serves virtually all subscribers in its local serving 
area, an incumbent LEC has little economic incentive to assist new 
entrants in their efforts to secure a greater share of that market. An 
incumbent LEC also has the ability to act on its incentive to 
discourage entry and robust competition by not interconnecting its 
network with the new entrant's network or by insisting on 
supracompetitive prices or other unreasonable conditions for 
terminating calls from the entrant's customers to the incumbent LEC's 
subscribers.
    11. Congress addressed these problems in the 1996 Act by mandating 
that the most significant economic impediments to efficient entry into 
the monopolized local market must be

[[Page 45481]]

removed. The incumbent LECs have economies of density, connectivity, 
and scale; traditionally, these have been viewed as creating a natural 
monopoly. As we pointed out in our NPRM, the local competition 
provisions of the Act require that these economies be shared with 
entrants. We believe they should be shared in a way that permits the 
incumbent LECs to maintain operating efficiency to further fair 
competition, and to enable the entrants to share the economic benefits 
of that efficiency in the form of cost-based prices. Congress also 
recognized that the transition to competition presents special 
considerations in markets served by smaller telephone companies, 
especially in rural areas. We are mindful of these considerations, and 
know that they will be taken into account by state commissions as well.
    12. The Act contemplates three paths of entry into the local 
market--the construction of new networks, the use of unbundled elements 
of the incumbent's network, and resale. The 1996 Act requires us to 
implement rules that eliminate statutory and regulatory barriers and 
remove economic impediments to each. We anticipate that some new 
entrants will follow multiple paths of entry as market conditions and 
access to capital permit. Some may enter by relying at first entirely 
on resale of the incumbent's services and then gradually deploying 
their own facilities. This strategy was employed successfully by MCI 
and Sprint in the interexchange market during the 1970's and 1980's. 
Others may use a combination of entry strategies simultaneously--
whether in the same geographic market or in different ones. Some 
competitors may use unbundled network elements in combination with 
their own facilities to serve densely populated sections of an 
incumbent LEC's service territory, while using resold services to reach 
customers in less densely populated areas. Still other new entrants may 
pursue a single entry strategy that does not vary by geographic region 
or over time. Section 251 neither explicitly nor implicitly expresses a 
preference for one particular entry strategy. Moreover, given the 
likelihood that entrants will combine or alter entry strategies over 
time, an attempt to indicate such a preference in our section 251 rules 
may have unintended and undesirable results. Rather, our obligation in 
this proceeding is to establish rules that will ensure that all pro-
competitive entry strategies may be explored. As to success or failure, 
we look to the market, not to regulation, for the answer.
    13. We note that an entrant, such as a cable company, that 
constructs its own network will not necessarily need the services or 
facilities of an incumbent LEC to enable its own subscribers to 
communicate with each other. A firm adopting this entry strategy, 
however, still will need an agreement with the incumbent LEC to enable 
the entrant's customers to place calls to and receive calls from the 
incumbent LEC's subscribers. Sections 251 (b)(5) and (c)(2) require 
incumbent LECs to enter into such agreements on just, reasonable, and 
nondiscriminatory terms and to transport and terminate traffic 
originating on another carrier's network under reciprocal compensation 
arrangements. In this item, we adopt rules for states to apply in 
implementing these mandates of section 251 in their arbitration of 
interconnection disputes, as well as their review of such arbitrated 
arrangements, or a BOC's statement of generally available terms. We 
believe that our rules will assist the states in carrying out their 
responsibilities under the 1996 Act, thereby furthering the Act's goals 
of fostering prompt, efficient, competitive entry.
    14. We also note that many new entrants will not have fully 
constructed their local networks when they begin to offer service. 
Joint Managers' Statement, S. Conf. Rep. No. 104-230, 104th Cong., 2d 
Sess. 113 (1996) (``Joint Explanatory Statement'') at 121. Although 
they may provide some of their own facilities, these new entrants will 
be unable to reach all of their customers without depending on the 
incumbent's facilities. Hence, in addition to an arrangement for 
terminating traffic on the incumbent LEC's network, entrants will 
likely need agreements that enable them to obtain wholesale prices for 
services they wish to sell at retail and to use at least some portions 
of the incumbents' facilities, such as local loops and end office 
switching facilities.
    15. Congress recognized that, because of the incumbent LEC's 
incentives and superior bargaining power, its negotiations with new 
entrants over the terms of such agreements would be quite different 
from typical commercial negotiations. As distinct from bilateral 
commercial negotiation, the new entrant comes to the table with little 
or nothing the incumbent LEC needs or wants. The statute addresses this 
problem by creating an arbitration proceeding in which the new entrant 
may assert certain rights, including that the incumbent's prices for 
unbundled network elements must be ``just, reasonable and 
nondiscriminatory.'' We adopt rules herein to implement these 
requirements of section 251(c)(3).

D. Operational Barriers

    16. The statute also directs us to remove the existing operational 
barriers to entering the local market. Vigorous competition would be 
impeded by technical disadvantages and other handicaps that prevent a 
new entrant from offering services that consumers perceive to be equal 
in quality to the offerings of incumbent LECs. Our recently-issued 
number portability Report and Order addressed one of the most 
significant operational barriers to competition by permitting customers 
to retain their phone numbers when they change local carriers. 
Telephone Number Portability, CC Docket No. 95-116, First Report and 
Order and Further Notice of Proposed Rulemaking, FCC 96-286 (July 2, 
1996) (61 FR 38605 (July 25, 1996)) (Number Portability Order). 
Consistent with the 1996 Act, 47 U.S.C. Sec. 251(b)(2), we required 
LECs to implement interim and long-term measures to ensure that 
customers can change their local service providers without having to 
change their phone number. Number portability promotes competition by 
making it less expensive and less disruptive for a customer to switch 
providers, thus freeing the customer to choose the local provider that 
offers the best value.
    17. Closely related to number portability is dialing parity, which 
we address in a companion order. Dialing parity enables a customer of a 
new entrant to dial others with the convenience an incumbent provides, 
regardless of which carrier the customer has chosen as the local 
service provider. The history of competition in the interexchange 
market illustrates the critical importance of dialing parity to the 
successful introduction of competition in telecommunications markets. 
Equal access enabled customers of non-AT&T providers to enjoy the same 
convenience of dialing ``1'' plus the called party's number that AT&T 
customers had. Prior to equal access, subscribers to interexchange 
carriers (IXCs) other than AT&T often were required to dial more than 
20 digits to place an interstate long-distance call. Industry data show 
that, after equal access was deployed throughout the country, the 
number of customers using MCI and other long-distance carriers 
increased significantly. Federal Communications Commission, Statistics 
of Communications Common Carriers 1994-95, at 344, Table 8.8; Federal 
Communications Commission, Report on Long Distance Market Share, Second 
Quarter 1995, at 14, table 6 (Oct. 1995). Thus, we believe that equal 
access had a substantial pro-competitive

[[Page 45482]]

impact. Dialing parity should have the same effect.
    18. This Order addresses other operational barriers to competition, 
such as access to rights of way, collocation, and the expeditious 
provisioning of resale and unbundled elements to new entrants. The 
elimination of these obstacles is essential if there is to be a fair 
opportunity to compete in the local exchange and exchange access 
markets. As an example, customers can voluntarily switch from one 
interexchange carrier to another extremely rapidly, through automated 
systems. This has been a boon to competition in the interexchange 
market. We expect that moving customers from one local carrier to 
another rapidly will be essential to fair local competition.
    19. As competition in the local exchange market emerges, 
operational issues may be among the most difficult for the parties to 
resolve. Thus, we recognize that, along with the state commissions and 
the courts, we will be called upon to enforce provisions of arbitrated 
agreements and our rules relating to these operational barriers to 
entry. Because of the critical importance of eliminating these barriers 
to the accomplishment of the Act's pro-competitive objectives, we 
intend to enforce our rules in a manner that is swift, sure, and 
effective. To this end we will review, with the states, our enforcement 
techniques during the fourth quarter of 1996.
    20. We recognize that during the transition from monopoly to 
competition it is vital that we and the states vigilantly and 
vigorously enforce the rules that we adopt today and that will be 
adopted in the future to open local markets to competition. If we fail 
to meet that responsibility, the actions that we take today to 
accomplish the 1996 Act's pro-competitive, deregulatory objectives may 
prove to be ineffective.

E. Transition

    21. We consider it vitally important to establish a ``pro-
competitive, deregulatory national policy framework'' for local 
telephony competition, but we are acutely mindful of existing common 
carrier arrangements, relationships, and expectations, particularly 
those that affect incumbent LECs. In light of the timing issues 
described above, we think it wise to provide some appropriate 
transitions.
    22. In this regard, this Order sets minimum, uniform, national 
rules, but also relies heavily on states to apply these rules and to 
exercise their own discretion in implementing a pro-competitive regime 
in their local telephone markets. On those issues where the need to 
create a factual record distinct to a state or to balance unique local 
considerations is material, we ask the states to develop their own 
rules that are consistent with general guidance contained herein. The 
states will do so in rulemakings and in arbitrating interconnection 
arrangements. On other issues, particularly those related to pricing, 
we facilitate the ability of states to adopt immediate, temporary 
decisions by permitting the states to set proxy prices within a defined 
range or subject to a ceiling. We believe that some states will find 
these alternatives useful in light of the strict deadlines of the law. 
For example, section 252(b)(4)(C) requires a state commission to 
complete the arbitration of issues that have been referred to it, 
pursuant to section 252(b)(1), within nine months after the incumbent 
local exchange carrier received the request for negotiation. Selection 
of the actual prices within the range or subject to the ceiling will be 
for the state commission to determine. Some states may use proxies 
temporarily because they lack the resources necessary to review cost 
studies in rulemakings or arbitrations. Other states may lack adequate 
resources to complete such tasks before the expiration of the 
arbitration deadline. However, we encourage all states to complete the 
necessary work within the statutory deadline. Our expectation is that 
the bulk of interconnection arrangements will be concluded through 
arbitration or agreement, by the beginning of 1997. Not until then will 
we be able to determine more precisely the impact of this Order on 
promoting competition. Between now and then, we are eager to continue 
our work with the states. In this period, as set forth earlier, we 
should be able to take major steps toward implementing a new universal 
service system and far-reaching reform of interstate access. These 
reforms will reflect intensive dialogue between us and the states.
    23. Similarly, as states implement the rules that we adopt in this 
order as well as their own decisions, they may find it useful to 
consult with us, either formally or informally, regarding particular 
aspects of these rules. We encourage and invite such inquiries because 
we believe that such consultations are likely to provide greater 
certainty to the states as they apply our rules to specific arbitration 
issues and possibly to reduce the burden of expensive judicial 
proceedings on states. A variety of formal and informal procedures 
exist under our rules for such consultations, and we may find it 
helpful to fashion others as we gain additional experience under the 
1996 Act.

F. Executive Summary

1. Scope of Authority of the FCC and State Commissions
    24. The Commission concludes that sections 251 and 252 address both 
interstate and intrastate aspects of interconnection, resale services, 
and access to unbundled elements. The 1996 Act moves beyond the 
distinction between interstate and intrastate matters that was 
established in the 1934 Act, and instead expands the applicability of 
national rules to historically intrastate issues, and state rules to 
historically interstate issues. In the Report and Order, the Commission 
concludes that the states and the FCC can craft a partnership that is 
built on mutual commitment to local telephone competition throughout 
the country, and that under this partnership, the FCC establishes 
uniform national rules for some issues, the states, and in some 
instances the FCC, administer these rules, and the states adopt 
additional rules that are critical to promoting local telephone 
competition. The rules that the FCC establishes in this Report and 
Order are minimum requirements upon which the states may build. The 
Commission also intends to review and amend the rules it adopts in this 
Report and Order to take into account competitive developments, states' 
experiences, and technological changes.
2. Duty to Negotiate in Good Faith
    25. In the Report and Order, the Commission establishes some 
national rules regarding the duty to negotiate in good faith, but 
concludes that it would be futile to try to determine in advance every 
possible action that might be inconsistent with the duty to negotiate 
in good faith. The Commission also concludes that, in many instances, 
whether a party has negotiated in good faith will need to be decided on 
a case-by-case basis, in light of the particular circumstances. The 
Commission notes that the arbitration process set forth in section 252 
provides one remedy for failing to negotiate in good faith. The 
Commission also concludes that agreements that were negotiated before 
the 1996 Act was enacted, including agreements between neighboring 
LECs, must be filed for review by the state commission pursuant to 
section 252(a).

[[Page 45483]]

If the state commission approves such agreements, the terms of those 
agreements must be made available to requesting telecommunications 
carriers in accordance with section 252(i).
3. Interconnection
    26. Section 251(c)(2) requires incumbent LECs to provide 
interconnection to any requesting telecommunications carrier at any 
technically feasible point. The interconnection must be at least equal 
in quality to that provided by the incumbent LEC to itself or its 
affiliates, and must be provided on rates, terms, and conditions that 
are just, reasonable, and nondiscriminatory. The Commission concludes 
that the term ``interconnection'' under section 251(c)(2) refers only 
to the physical linking of two networks for the mutual exchange of 
traffic. The Commission identifies a minimum set of five ``technically 
feasible'' points at which incumbent LECs must provide interconnection: 
(1) the line side of a local switch (for example, at the main 
distribution frame); (2) the trunk side of a local switch; (3) the 
trunk interconnection points for a tandem switch; (4) central office 
cross-connect points; and (5) out-of-band signalling facilities, such 
as signalling transfer points, necessary to exchange traffic and access 
call-related databases. In addition, the points of access to unbundled 
elements (discussed below) are also technically feasible points of 
interconnection. The Commission finds that telecommunications carriers 
may request interconnection under section 251(c)(2) to provide 
telephone exchange or exchange access service, or both. If the request 
is for such purpose, the incumbent LEC must provide interconnection in 
accordance with section 251(c)(2) and the Commission's rules thereunder 
to any telecommunications carrier, including interexchange carriers and 
commercial mobile radio service (CMRS) providers.
4. Access to Unbundled Elements
    27. Section 251(c)(3) requires incumbent LECs to provide requesting 
telecommunications carriers nondiscriminatory access to network 
elements on an unbundled basis at any technically feasible point on 
rates, terms, and conditions that are just, reasonable, and 
nondiscriminatory. In the Report and Order, the Commission identifies a 
minimum set of network elements that incumbent LECs must provide under 
this section. States may require incumbent LECs to provide additional 
network elements on an unbundled basis. The minimum set of network 
elements the Commission identifies are: local loops, local and tandem 
switches (including all vertical switching features provided by such 
switches), interoffice transmission facilities, network interface 
devices, signalling and call-related database facilities, operations 
support systems and information, and operator and directory assistance 
facilities. The Commission concludes that incumbent LECs must provide 
nondiscriminatory access to operations support systems and information 
by January 1, 1997. The Commission concludes that access to such 
operations support systems is critical to affording new entrants a 
meaningful opportunity to compete with incumbent LECs. The Commission 
also concludes that incumbent LECs are required to provide access to 
network elements in a manner that allows requesting carriers to combine 
such elements as they choose, and that incumbent LECs may not impose 
restrictions upon the uses to which requesting carriers put such 
network elements.
5. Methods of Obtaining Interconnection and Access to Unbundled 
Elements
    28. Section 251(c)(6) requires incumbent LECs to provide physical 
collocation of equipment necessary for interconnection or access to 
unbundled network elements at the incumbent LEC's premises, except that 
the incumbent LEC may provide virtual collocation if it demonstrates to 
the state commission that physical collocation is not practical for 
technical reasons or because of space limitations. The Commission 
concludes that incumbent LECs are required to provide for any 
technically feasible method of interconnection or access requested by a 
telecommunications carrier, including physical collocation, virtual 
collocation, and interconnection at meet points. The Commission adopts, 
with certain modifications, some of the physical and virtual 
collocation requirements it adopted earlier in the Expanded 
Interconnection proceeding. The Commission also establishes rules 
interpreting the requirements of section 251(c)(6).
6. Pricing Methodologies
    29. The 1996 Act requires the states to set prices for 
interconnection and unbundled elements that are cost-based, 
nondiscriminatory, and may include a reasonable profit. To help the 
states accomplish this, the Commission concludes that the state 
commissions should set arbitrated rates for interconnection and access 
to unbundled elements pursuant a forward-looking economic cost pricing 
methodology. The Commission concludes that the prices that new entrants 
pay for interconnection and unbundled elements should be based on the 
local telephone companies Total Element Long-Run Incremental Cost 
(TELRIC) of providing a particular network element, plus a reasonable 
share of forward-looking joint and common costs. States will determine, 
among other things, the appropriate risk-adjusted cost of capital and 
depreciation rates. For states that are unable to conduct a cost study 
and apply an economic costing methodology within the statutory time 
frame for arbitrating interconnection disputes, the Commission 
establishes default ceilings and ranges for the states to apply, on an 
interim basis, to interconnection arrangements. The Commission 
establishes a default range of 0.2-0.4 cents per minute for switching, 
plus access charges as discussed below. For tandem switching, the 
Commission establishes a default ceiling of 0.15 cents per minute. The 
Order also establishes default ceilings for the other unbundled network 
elements.
7. Access Charges for Unbundled Switching
    30. Nothing in this Report and Order alters the collection of 
access charges paid by an interexchange carrier under Part 69 of the 
Commission's rules, when the incumbent LEC provides exchange access 
service to an interexchange carrier, either directly or through service 
resale. Because access charges are not included in the cost-based 
prices for unbundled network elements, and because certain portions of 
access charges currently support the provision of universal service, 
until the access charge reform and universal service proceedings have 
been completed, the Commission continues to provide for access charge 
recovery with respect to use of an incumbent LEC's unbundled switching 
element, for a defined period of time. This will minimize the 
possibility that the incumbent LEC will be able to ``double recover,'' 
through access charges, the facility costs that new entrants have 
already paid to purchase unbundled elements, while preserving the 
status quo with respect to subsidy payments. Incumbent LECs will 
recover from interconnecting carriers the carrier common line charge 
and a charge equal to 75% of the transport interconnection charge for 
all interstate minutes traversing the incumbent LECs local switches for 
which the interconnecting carriers pay unbundled network element 
charges. This aspect of the Order expires at the earliest of: (1)

[[Page 45484]]

June 30, 1997; (2) issuance of final decisions by the Commission in the 
universal service and access reform proceedings; or (3) if the 
incumbent LEC is a Bell Operating Company (BOC), the date on which that 
BOC is authorized under section 271 of the Act to provide in-region 
interLATA service, for any given state.
8. Resale
    31. The 1996 Act requires all incumbent LECs to offer for resale 
any telecommunications service that the carrier provides at retail to 
subscribers who are not telecommunications carriers. Resale will be an 
important entry strategy both in the short term for many new entrants 
as they build out their own facilities and for small businesses that 
cannot afford to compete in the local exchange market by purchasing 
unbundled elements or by building their own networks. State commissions 
must identify marketing, billing, collection, and other costs that will 
be avoided or that are avoidable by incumbent LECs when they provide 
services wholesale, and calculate the portion of the retail rates for 
those services that is attributable to the avoided and avoidable costs. 
The Commission identifies certain avoided costs, and the application of 
this definition is left to the states. If a state elects not to 
implement the methodology, it may elect, on an interim basis, a 
discount rate from within a default range of discount rates established 
by the Commission. The Commission establishes a default discount range 
of 17-25% off retail prices, leaving the states to set the specific 
rate within that range, in the exercise of their discretion.
9. Requesting Telecommunications Carriers
    32. The Commission concludes that, to the extent that a carrier is 
engaged in providing for a fee local, interexchange, or international 
basic services directly to the public or to such classes of users as to 
be effectively available directly to the public, the carrier is a 
``telecommunications carrier,'' and is thus subject to the requirements 
of section 251(a) and the benefits of section 251(c). The Commission 
concludes that CMRS providers are telecommunications carriers, and that 
private mobile radio service (PMRS) providers generally are not 
telecommunications carriers, except to the extent that a PMRS provider 
uses excess capacity to provide local, interexchange, or international 
services for a fee directly to the public. The Commission also 
concludes that, if a company provides both telecommunications services 
and information services, it must be classified as a telecommunications 
carrier.
10. Commercial Mobile Radio Service
    33. The Commission concludes that LECs are obligated, pursuant to 
section 251(b)(5) and the corresponding pricing standards of section 
252(d)(2) to enter into reciprocal compensation arrangements with CMRS 
providers, including paging providers, for the transport and 
termination of traffic on each other's networks. The Commission 
concludes that many CMRS providers (specifically cellular, broadband 
PCS and covered specialized mobile radio (SMR) providers) offer 
telephone exchange service and exchange access, and that incumbent LECs 
therefore must make interconnection available to these CMRS providers 
in conformity with sections 251(c) and 252. The Commission concludes 
that CMRS providers should not be classified as LECs at this time. The 
Commission also concludes that it may apply section 251 and 252 to LEC-
CMRS interconnection. By opting to proceed under sections 251 and 252, 
the Commission is not finding that section 332 jurisdiction over 
interconnection has been repealed by implication, and the Commission 
acknowledges that section 332, in tandem with section 201, is a basis 
for jurisdiction over LEC-CMRS interconnection.
11. Transport and Termination
    34. The 1996 Act requires that charges for transport and 
termination of traffic be cost-based. The Commission concludes that 
state commissions, during arbitrations, should set symmetrical prices 
based on the local telephone company's forward-looking costs. The state 
commissions would also use the TELRIC methodology when establishing 
rates for transport and termination. The Commission establishes a 
default range of 0.2-0.4 cents per minute for end office termination 
for states which have not conducted a TELRIC cost study. The Commission 
finds significant evidence in the record in support of the lower end of 
the ranges. In addition, the Commission finds that additional 
reciprocal charges could apply to termination through a tandem switch. 
The default ceiling for tandem switching is 0.15 cents per minute, plus 
applicable charges for transport from the tandem switch to the end 
office. Each state opting for the default approach for a limited period 
of time, may select a rate within that range.
12. Access to Rights of Way
    35. The Commission amends its rules to implement the pole 
attachment provisions of the 1996 Act. Specifically, the Commission 
establishes procedures for nondiscriminatory access by cable television 
systems and telecommunications carriers to poles, ducts, conduits, and 
rights-of-way owned by utilities or LECs. The Order includes several 
specific rules as well as a number of more general guidelines designed 
to facilitate the negotiation and mutual performance of fair, pro-
competitive access agreements without the need for regulatory 
intervention. Additionally, an expedited dispute resolution is provided 
when good faith negotiations fail, as are requirements concerning 
modifications to poles, ducts, conduits, and rights-of-way and the 
allocation of the costs of such modifications.
13. Obligations Imposed on non-incumbent LECs
    36. The Commission concludes that states generally may not impose 
on non-incumbent LECs the obligations set forth in section 251(c) 
entitled, ``Additional Obligations on Incumbent Local Exchange 
Carriers.'' Section 251(h)(2) sets forth a process by which the 
Commission may decide to treat LECs as incumbent LECs, and state 
commissions or other interested parties may ask the Commission to issue 
a rule, in accordance with section 251(h)(2), providing for the 
treatment of a LEC as an incumbent LEC. In addition to this Report and 
Order, the Commission addresses in separate proceedings some of the 
obligations, such as dialing parity and number portability, that 
section 251(b) imposes on all LECs.
14. Exemptions, Suspensions, and Modifications of Section 251 
Requirements
    37. Section 251(f)(1) provides for exemption from the requirements 
in section 251(c) for rural telephone companies (as defined by the 1996 
Act) under certain circumstances. Section 251(f)(2) permits LECs with 
fewer than 2 percent of the nation's subscriber lines to petition for 
suspension or modification of the requirements in sections 251(b) or 
(c). In the Report and Order, the Commission establishes a very limited 
set of rules interpreting the requirements of section 251(f). For 
example, the Commission finds that LECs bear the burden of proving to 
the state commission that a suspension or modification of the 
requirements of section 251(b) or (c) is justified. Rural LECs bear the 
burden of proving that

[[Page 45485]]

continued exemption of the requirements of section 251(c) is justified, 
once a bona fide request has been made by a carrier under section 251. 
The Commission also concludes that only LECs that, at the holding 
company level, have fewer than 2 percent of the nation's subscriber 
lines are entitled to petition for suspension or modification of 
requirements under section 251(f)(2). For the most part, however, the 
states will interpret the provisions of section 251(f) through 
rulemaking and adjudicative proceedings, and will be responsible for 
determining whether a LEC in a particular instance is entitled to 
exemption, suspension, or modification of section 251 requirements.
15. Commission Responsibilities Under Section 252
    38. Section 252(e)(5) requires the Commission to assume the state's 
responsibilities under section 252 if the state ``fails to act to carry 
out its responsibility'' under that section. In the Report and Order, 
the Commission adopts a minimum set of rules that will provide notice 
of the standards and procedures that the Commission will use if it has 
to assume the responsibility of a state commission under section 
252(e)(5). The Commission concludes that, if it arbitrates agreements, 
it will use a ``final offer'' arbitration method, under which each 
party to the arbitration proposes its best and final offer, and the 
arbitrator chooses among the proposals. The arbitrator could choose a 
proposal in its entirety, or could choose different parties' proposals 
on an issue-by-issue basis. In addition, the parties could continue to 
negotiate an agreement after they submit their proposals and before the 
arbitrator makes a decision.
    39. Section 252(i) of the 1996 Act requires that incumbent LECs 
make available to any requesting telecommunications carrier any 
individual interconnection, service, or network element on the same 
terms and conditions as contained in any agreement approved under 
Section 252 to which they are a party. The Commission concludes that 
section 252(i) entitles all carriers with interconnection agreements to 
``most favored nation'' status regardless of whether such a clause is 
in their agreement. Carriers may obtain any individual interconnection, 
service, or network element under the same terms and conditions as 
contained in any publicly filed interconnection agreement without 
having to agree to the entire agreement. Additionally, carriers seeking 
interconnection, network elements, or services pursuant to section 
252(i) need not make such requests pursuant to the procedures for 
initial section 251 requests, but instead may obtain access to 
agreement provisions on an expedited basis.

II. Scope of the Commission's Rules

    40. In implementing section 251, we conclude that some national 
rules are necessary to promote Congress's goals for a national policy 
framework and serve the public interest, and that states should have 
the major responsibility for prescribing the specific terms and 
conditions that will lead to competition in local exchange markets. Our 
approach in this Report and Order has been a pragmatic one, consistent 
with the Act, with respect to this allocation of responsibilities. We 
believe that the steps necessary to implement section 251 are not 
appropriately characterized as a choice between specific national rules 
on the one hand and substantial state discretion on the other. We adopt 
national rules where they facilitate administration of sections 251 and 
252, expedite negotiations and arbitrations by narrowing the potential 
range of dispute where appropriate to do so, offer uniform 
interpretations of the law that might not otherwise emerge until after 
years of litigation, remedy significant imbalances in bargaining power, 
and establish the minimum requirements necessary to implement the 
nationwide competition that Congress sought to establish. This is 
consistent with our obligation to ``complete all actions necessary to 
establish regulations to implement the requirements'' of section 251. 
Some of these rules will be relatively self-executing. In many 
instances, however, the rules we establish call on the states to 
exercise significant discretion and to make critical decisions through 
arbitrations and development of state-specific rules. Over time, we 
will continue to review the allocation of responsibilities, and we will 
reallocate them if it appears that we have inappropriately or 
inefficiently designated the decisionmaking roles.
    41. The decisions in this Report and Order, and in this Section in 
particular, benefit from valuable insights provided by states based on 
their experiences in establishing rules and taking other actions 
intended to foster local competition. Through formal comments, ex parte 
meetings, and open forums, state commissioners and their staffs 
provided extensive, detailed information to us regarding difficult or 
complex issues that they have encountered, and the various approaches 
they have adopted to address those issues. Information from the states 
highlighted both differences among communities within states, as well 
as similarities among states. Recent state rules and orders that take 
into account the local competition provisions of the 1996 Act have been 
particularly helpful to our deliberations about the types of national 
rules that will best further the statute's goal of encouraging local 
telephone competition. See, e.g, Petition of AT&T for the Commission to 
Establish Resale Rules, Rates, Terms and Condition and the Initial 
Unbundling of Services, Docket No. 6352-U (Georgia Commission May 29, 
1996); AT&T Communications of Illinois, Inc. et al., Petition for a 
Total Local Exchange Wholesale Service Tariff from Illinois Bell 
Telephone Company, Nos. 95-0458 and 95-0531 (consol.) (Illinois 
Commission June 26, 1996); Hawaii Administrative Rules, Ch. 6-80, 
``Competition in Telecommunications Services,'' (Hawaii Commission May 
17, 1996); Public Utilities Commission of Ohio Case No. 95-845-TP-COI 
(Local Competition) (Ohio Commission June 12, 1996) and Implementation 
of the Mediation and Arbitration Provisions of the Federal 
Telecommunications Act of 1996, Case No. 96-463-TP-UNC (Ohio Commission 
May 30, 1996); Proposed Rules regarding Implementation of Secs. 40-15-
101 et seq. Requirements relating to Interconnection and Unbundling, 
Docket No. 95R-556T (Colorado Commission April 25, 1996) (one of a 
series of Orders adopted by the Colorado Commission in response to the 
local competition provisions of the 1996 Act); Washington Utilities and 
Transportation Commission, Fifteenth Supplemental Order, Decision and 
Order Rejecting Tariff Revisions, Requiring Refiling, Docket No. UT-
950200 (Washington Commission April 1996). These state decisions also 
offered useful insights in determining the extent to which the 
Commission should set forth uniform national rules, and the extent to 
which we should ensure that states can impose varying requirements. Our 
contact with state commissioners and their staffs, as well as recent 
state actions, make clear that states and the FCC share a common 
commitment to creating opportunities for efficient new entry into the 
local telephone market. Our experience in working with state 
commissions since passage of the 1996 Act confirms that we will achieve 
that goal most effectively and quickly by working cooperatively with 
one another now and in the future as the country's emerging competition 
policy presents new difficulties and opportunities.

[[Page 45486]]

    42. We also received helpful advice and assistance from other 
government agencies, including the National Telecommunications and 
Information Administration (NTIA), the Department of Justice, and the 
Department of Defense about how national rules could further the public 
interest. In addition, comments from industry members and consumer 
advocacy groups helped us understand better the varying and competing 
concerns of consumers and different representatives of the 
telecommunications industry. We benefitted as well by discovering that 
there are certain matters on which there is substantial agreement about 
the role the Commission should play in establishing and enforcing 
provisions of section 251.

A. Advantages and Disadvantages of National Rules

1. Background
    43. Section 251(d)(1) instructs the Commission, within six months 
after the enactment of the 1996 Act (that is, by August 8, 1996), to 
``establish regulations to implement the requirements of [section 
251].'' The Commission's implementing rules should be designed ``to 
accelerate rapidly private sector deployment of advanced 
telecommunications and information technologies and services to all 
Americans by opening all telecommunications markets to competition.'' 
Joint Explanatory Statement at 1. In addition, section 253 requires the 
Commission to preempt the enforcement of any state or local statute, 
regulation, or legal requirement that ``prohibit[s] or [has] the effect 
of prohibiting the ability of any entity to provide any interstate or 
intrastate telecommunications service.''
    44. In the NPRM, we stated our belief that we should implement 
Congress's goal of a pro-competitive, de-regulatory, national policy 
framework by adopting national rules that are designed to secure the 
full benefits of competition for consumers, with due regard to work 
already done by the states. We sought comment on the extent to which we 
should adopt explicit national rules, and the extent to which 
permitting variations among states would further Congress's pro-
competitive goals. We anticipated that we would rely on actions some 
states have already taken to address interconnection and other issues 
related to opening local markets to competition. In the NPRM, we set 
forth some of the benefits that would likely result from implementing 
explicit national rules, and some of the benefits that would likely 
result from allowing variations among states.
2. Discussion
    45. Comments and ex parte discussions with state commission 
representatives have convinced us that we share with states a common 
goal of promoting competition in local exchange markets. We conclude 
that states and the FCC can craft a working relationship that is built 
on mutual commitment to local service competition throughout the 
country, in which the FCC establishes uniform, national rules for some 
issues, the states and the FCC administer these rules, and the states 
adopt other critically important rules to promote competition. In 
implementing the national rules we adopt in this Report and Order, 
states will help to illuminate and develop innovative solutions 
regarding many complex issues for which we have not attempted to 
prescribe national rules at this time, and states will adopt specific 
rules that take into account local concerns. In this Report and Order, 
and in subsequent actions we intend to take, we have and will continue 
to seek guidance from various states that have taken the lead in 
establishing pro-competitive requirements. We also expect to rely 
heavily on state input and experience in other FCC proceedings, such as 
access reform and petitions concerning BOC entry into in-region 
interLATA markets. Virtually every decision in this Report and Order 
borrows from decisions reached at the state level, and we expect this 
close association with and reliance on the states to continue in the 
future. We therefore encourage states to continue to pursue their own 
pro-competitive policies. Indeed, we hope and expect that this Report 
and Order will foster an interactive process by which a number of 
policies consistent with the 1996 Act are generated by states.
    46. We find that certain national rules are consistent with the 
terms and the goals of the statute. Section 251 sets forth a number of 
rights with respect to interconnection, resale services, and unbundled 
network elements. We conclude that the Commission should define at 
least certain minimum obligations that section 251 requires, 
respectively, of all telecommunications carriers, LECs, or incumbent 
LECs. For example, as discussed in more detail below, we conclude that 
it is reasonable to identify a minimum number of network elements that 
incumbent LECs must unbundle and make available to requesting carriers 
pursuant to the standards set forth in sections 251 (c) and (d), while 
also permitting states to go beyond that minimum list and impose 
additional requirements that are consistent with the 1996 Act and the 
FCC's implementing rules. We find no basis for permitting an incumbent 
LEC in some states not to make available these minimum technically 
feasible network elements that are provided by incumbent LECs in other 
states. We point out, however, that a uniform rule does not necessarily 
mean uniform results. For example, a national pricing methodology takes 
into account local factors and inputs, and thus may lead to different 
prices in different states, and different regions within states. In 
addition, parties that voluntarily negotiate agreements need not comply 
with the requirements we establish under sections 251 (b) and (c), 
including any pricing rules we adopt. We intend to review on an ongoing 
basis the rules we adopt herein in light of competitive developments, 
states' experiences, and technological changes.
    47. We find that incumbent LECs have no economic incentive, 
independent of the incentives set forth in sections 271 and 274 of the 
1996 Act, to provide potential competitors with opportunities to 
interconnect with and make use of the incumbent LEC's network and 
services. Negotiations between incumbent LECs and new entrants are not 
analogous to traditional commercial negotiations in which each party 
owns or controls something the other party desires. Under section 251, 
monopoly providers are required to make available their facilities and 
services to requesting carriers that intend to compete directly with 
the incumbent LEC for its customers and its control of the local 
market. Therefore, although the 1996 Act requires incumbent LECs, for 
example, to provide interconnection and access to unbundled elements on 
rates, terms, and conditions that are just, reasonable, and 
nondiscriminatory, incumbent LECs have strong incentives to resist such 
obligations. The inequality of bargaining power between incumbents and 
new entrants militates in favor of rules that have the effect of 
equalizing bargaining power in part because many new entrants seek to 
enter national or regional markets. National (as opposed to state) 
rules more directly address these competitive circumstances.
    48. We emphasize that, under the statute, parties may voluntarily 
negotiate agreements ``without regard to'' the rules that we establish 
under sections 251 (b) and (c). However, fair negotiations will be 
expedited by the promulgation of national rules. Similarly, state 
arbitration of interconnection agreements now and in

[[Page 45487]]

the future will be expedited and simplified by a clear statement of 
terms that must be included in every arbitrated agreement, absent 
mutual consent to different terms. Such efficiency and predictability 
should facilitate entry decisions, and in turn enhance opportunities 
for local exchange competition. In addition, for new entrants seeking 
to provide service on a national or regional basis, minimum national 
requirements may reduce the need for designing costly multiple network 
configurations and marketing strategies, and allow more efficient 
competition. More efficient competition will, in turn, benefit 
consumers. Further, national rules will reduce the need for competitors 
to revisit the same issue in 51 different jurisdictions, thereby 
reducing administrative burdens and litigation for new entrants and 
incumbents.
    49. We also believe that some explicit national standards will be 
helpful in enabling the Commission and the states to carry out other 
responsibilities under the 1996 Act. For example, national standards 
will enable the Commission to address issues swiftly if the Commission 
is obligated to assume section 252 responsibilities because a state 
commission has failed to act. In addition, BOCs that seek to offer long 
distance service in their service areas must satisfy, inter alia, a 
``competitive checklist'' set forth in section 271(c)(2)(B). Many of 
the competitive checklist provisions require compliance with specific 
provisions of section 251. For example, the checklist requires BOCs to 
provide ``nondiscriminatory access to network elements in accordance 
with the requirements of sections 251(c)(3) and 252(d)(1).'' Some 
national rules also will help the states, the DOJ, and the FCC carry 
out their responsibilities under section 271, and assist BOCs in 
determining what steps must be taken to meet the requirements of 
section 271(c)(2)(B), the competitive checklist. In addition, national 
rules that establish the minimum requirements of section 251 will 
provide states with a consistent standard against which to conduct the 
fact-intensive process of verifying checklist compliance, the DOJ will 
have standards against which to evaluate the applications, and we will 
have standards to apply in adjudicating section 271 petitions in an 
extremely compressed time frame. Moreover, we believe that establishing 
minimum requirements that arbitrated agreements must satisfy will 
assist states in arbitrating and reviewing agreements under section 
252, particularly in light of the relatively short time frames for such 
state action. While some states reject the idea that national rules 
will help the state commissions to satisfy their obligations under 
section 252 to mediate, arbitrate, and review agreements, other states 
have welcomed national rules, at least with respect to certain matters.
    50. A broad range of parties urge the Commission to adopt minimum 
requirements that would permit states to impose additional, pro-
competitive requirements that are consistent with the 1996 Act to 
address local or state-specific circumstances. We agree generally that 
many of the rules we adopt should establish non-exhaustive 
requirements, and that states may impose additional pro-competitive 
requirements that are consistent with the purposes and terms of the 
1996 Act, including our regulations established pursuant to section 
251. In contrast, we conclude that the 1996 Act limits the obligations 
states may impose on non-incumbent carriers. See infra, Section XI.C. 
We also anticipate that the rules we adopt regarding interconnection, 
services, and access to unbundled elements will evolve to accommodate 
developments in technology and competitive circumstances, and that we 
will continue to draw on state experience in applying our rules and in 
addressing new or additional issues. We recognize that it is vital that 
we reexamine our rules over time in order to reflect developments in 
the dynamic telecommunications industry. We cannot anticipate all of 
the changes that will occur as a result of technological advancements, 
competitive developments, and practical experience, particularly at the 
state level. Therefore, ongoing review of our rules is inevitable. 
Moreover, we conclude that arbitrated agreements must permit parties to 
incorporate changes to our national rules, or to applicable state rules 
as such changes may be effective, without abrogating the entire 
contract. This will ensure that parties, regardless of when they enter 
into arbitrated agreements, will be able to take advantage of all 
applicable Commission and state rules as they evolve.
    51. Some parties contend that even minimum requirements may impede 
the ability of state commissions to take varying approaches to address 
particular circumstances or conditions. We agree with the contention 
that, although there are different market conditions from one area to 
another, such distinct areas do not necessarily replicate state 
boundaries. For example, virtually all states include both more 
densely-populated areas and sparsely populated rural areas, and all 
include both business and residential areas. Although each state is 
unique in many respects, demographic and other differences among states 
do not suggest that national rules are inappropriate. Moreover, even 
though it may not be appropriate to impose identical requirements on 
carriers with different network technologies, our rules are intended to 
accommodate such differences. See infra, Section IV.E. (concluding that 
successful interconnection or access to an unbundled element at a 
particular point in the network creates a rebuttable presumption that 
such interconnection or access is technically feasible at networks that 
employ substantially similar facilities). We agree with parties, such 
as the Ohio Consumers' Counsel, that physical networks are not designed 
on a state-by-state basis. Ohio Consumers' Counsel comments at 4. Some 
parties have argued that explicit national standards will delay the 
emergence of local telephone competition, but none has offered 
persuasive evidence to substantiate that claim, and new entrants 
overwhelmingly favor strong national rules. We conclude, for the 
reasons set forth above, that some national rules will enhance 
opportunities for local competition, and we have chosen to adopt 
national rules where necessary to establish the minimum requirements 
for a nationwide pro-competitive policy framework.
    52. We disagree with those parties that claim we are trying to 
impose a uniformity that Congress did not intend. Variations among 
interconnection agreements will exist, because parties may negotiate 
their own terms, states may impose additional requirements that differ 
from state to state, and some terms are beyond the scope of this Report 
and Order. We conclude, however, that establishing certain rights that 
are available, through arbitration, to all requesting carriers, will 
help advise parties of their minimum rights and obligations, and will 
help speed the negotiation process. In effect, the Commission's rules 
will provide a national baseline for terms and conditions for all 
arbitrated agreements. Our rules also may tend to serve as a useful 
guide for negotiations by setting forth minimum requirements that will 
apply to parties if they are unable to reach agreement. This is 
consistent with the broad delegation of authority that Congress gave 
the Commission to implement the requirements set forth in section 251.
    53. We also believe that national rules will assist smaller 
carriers that seek to

[[Page 45488]]

provide competitive local service. As noted above, national rules will 
greatly reduce the need for small carriers to expend their limited 
resources securing their right to interconnection, services, and 
network elements to which they are entitled under the 1996 Act. This is 
particularly true with respect to discrete geographic markets that 
include areas in more than one state. We agree with the Small Business 
Administration that national rules will reduce delay and lower 
transaction costs, which impose particular hardships for small entities 
that are likely to have less of a financial cushion than larger 
entities. In addition, even a small provider may wish to enter more 
than one market, and national rules will create economies of scale for 
entry into multiple markets. We reject the position advocated by some 
parties that we should not adopt national rules because such rules will 
be particularly burdensome for small or rural incumbent LECs. We note, 
however, that section 251(f) provides relief from some of our rules.
    54. We recognize the concern of many state commissions that the 
Commission not undermine or reverse existing state efforts to foster 
local competition. We believe that Congress did not intend for us 
needlessly to disrupt the pro-competitive actions some states already 
have taken that are both consistent with the 1996 Act and our rules 
implementing section 251. We believe our rules will in many cases be 
consistent with pro-competitive actions already taken by states, and in 
fact, many of the rules we adopt are based directly on existing state 
commission actions. We also intend to continue to reflect states' 
experiences as we revise our rules. We also recognize, however, that in 
at least some instances existing state requirements will not be 
consistent with the statute and our implementing rules. It will be 
necessary in those instances for the subject states to amend their 
rules and alter their decisions to conform to our rules. In our 
judgment, national rules are highly desirable to achieve Congress's 
goal of a pro-competitive national policy framework for the 
telecommunications industry.

B. Suggested Approaches for FCC Rules

1. Discussion
    55. We intend to adopt minimum requirements in this proceeding; 
states may impose additional pro-competitive requirements that are 
consistent with the Act and our rules. We decline to adopt a 
``preferred outcomes'' approach, because such an approach would fail to 
establish explicit national standards for arbitration, and would fail 
to provide sufficient guidance to the parties' options in negotiations. 
To the extent that parties advocate ``preferred outcomes'' from which 
the parties could deviate in arbitrated agreements, we reject such a 
proposal, because we conclude that it would not provide the benefits 
conferred by establishing ``default'' requirements. To the extent that 
commenters advocate a regulatory approach that would require parties to 
justify a negotiated result different from the preferred outcomes, we 
believe that such an approach would impose greater constraints on 
voluntarily negotiated agreements than the 1996 Act permits. Under the 
1996 Act, parties may freely negotiate any terms without justifying 
deviation from ``preferred outcomes.'' The only restriction on such 
negotiated agreements is that they must be deemed by the state 
commission to be nondiscriminatory and consistent with the public 
interest, under the standards set forth in section 252(e)(2)(A). In 
response to the Illinois Commission's suggestion that we adopt a 
process by which states may seek waivers of our rules, we note that 
Commission rules already provide for waiver of our rules under certain 
circumstances. We decline to adopt a special waiver process in this 
proceeding.
    56. We intend our rules to give guidance to the parties regarding 
their rights and obligations under section 251. The specificity of our 
rules varies with respect to different issues; in some cases, we 
identify broad principles and leave to the states the determination of 
what specific requirements are necessary to satisfy those principles. 
In other cases, we find that local telephone competition will be better 
served by establishing specific requirements. In each of the sections 
below, we discuss the basis for adopting particular national principles 
or rules.
    57. We also believe that we should periodically review and amend 
our rules to take into account experiences of carriers and states, 
technological changes, and market developments. The actions we take 
here are fully responsive to Congress's mandate that we complete all 
actions necessary to establish regulations to implement the 
requirements of section 251 by August 8, 1996. We nevertheless retain 
authority to refine or augment our rules, or to follow a different 
course, after developing some practical experience with the rules 
adopted herein. It is beyond doubt that the Commission has ongoing 
rulemaking authority. For example, section 4(i) provides that the 
Commission ``may perform any and all acts, make such rules and 
regulations, and issue such orders, not inconsistent with the Act, as 
may be necessary in the execution of its functions.'' Section 4(j) 
provides that the Commission ``may conduct its proceedings in such 
manner as will best conduce to the proper dispatch and to the ends of 
justice.'' We agree with Sprint, the Illinois Commission, and other 
parties that we should address in this rulemaking the most important 
issues, and continue to refine our rules on an ongoing basis to address 
additional or unanticipated issues, and especially to learn from the 
decisions and experiences of the states. We also reject the argument of 
Margaretville Telephone Company that the 1996 Act constitutes an 
unconstitutional taking because it seeks to deprive incumbent LECs of 
their ``reasonable, investment-backed expectation to hold competitive 
advantages over new market entrants.''

C. Legal Authority of the Commission to Establish Rules Applicable to 
Intrastate Aspects of Interconnection, Services, and Unbundled Network 
Elements

1. Background
    58. In the NPRM, we tentatively concluded that Congress intended 
sections 251 and 252 to apply, and that our rules should apply, to both 
interstate and intrastate aspects of interconnection, services, and 
access to network elements. We stated in the NPRM that it would seem to 
make little sense, in terms of economics or technology, to distinguish 
between interstate and intrastate components for purposes of sections 
251 and 252. We also believed that such a distinction would appear to 
be inconsistent with Congress's desire to establish a national policy 
framework for interconnection and other issues critical to achieving 
local competition. We sought comment on these tentative conclusions.
    59. We further tentatively concluded in the NPRM that section 2(b) 
of the 1934 Act does not require a contrary conclusion. Section 2(b) 
states that, except as provided in certain enumerated sections not 
including sections 251 and 252, ``nothing in [the 1934] Act shall be 
construed to apply or to give to the Commission jurisdiction with 
respect to * * * charges, classifications, practices, services, 
facilities, or regulations for or in connection with intrastate 
communication service by wire or radio of any carrier * * *.'' We noted 
in the NPRM that sections 251 and 252 do not alter the jurisdictional 
division of authority with respect to matters falling outside the scope 
of these provisions. For example, rates charged to end users for local 
exchange service have

[[Page 45489]]

traditionally been subject to state authority, and will continue to be.
2. Discussion
    60. We conclude that, in enacting sections 251, 252, and 253, 
Congress created a regulatory system that differs significantly from 
the dual regulatory system it established in the 1934 Act. According to 
Senator Pressler, ``Progress is being stymied by a morass of regulatory 
barriers which balkanize the telecommunications industry into 
protective enclaves. We need to design a national policy framework--a 
new regulatory paradigm for telecommunications--which accommodates and 
accelerates technological change and innovation.'' 141 Cong. Rec. 
S7881-2, S7886 (June 7, 1995) (emphasis added). According to 
Representative Fields, ``[Congress] is decompartmentalizing segments of 
the telecommunications industry, opening the floodgates of competition 
through deregulation, and most importantly, giving consumers choice * * 
* '', 142 Cong. Rec. H1149 (Feb. 1, 1996). That Act generally gave 
jurisdiction over interstate matters to the FCC and over intrastate 
matters to the states. The 1996 Act alters this framework, and expands 
the applicability of both national rules to historically intrastate 
issues, and state rules to historically interstate issues. For example, 
section 253(a) suggests that states may establish regulations regarding 
interstate as well as intrastate matters. Indeed, many provisions of 
the 1996 Act are designed to open telecommunications markets to all 
potential service providers, without distinction between interstate and 
intrastate services.
    61. For the reasons set forth below, we hold that section 251 
authorizes the FCC to establish regulations regarding both interstate 
and intrastate aspects of interconnection, services, and access to 
unbundled elements. We also hold that the regulations the Commission 
establishes pursuant to section 251 are binding upon states and 
carriers and section 2(b) does not limit the Commission's authority to 
establish regulations governing intrastate matters pursuant to section 
251. Similarly, we find that the states' authority pursuant to section 
252 also extends to both interstate and intrastate matters. Although we 
recognize that these sections do not contain an explicit grant of 
intrastate authority to the Commission or of interstate authority to 
the states, we nonetheless find that this interpretation is the only 
reasonable way to reconcile the various provisions of sections 251 and 
252, and the statute as a whole. As we indicated in the NPRM, it would 
make little sense in terms of economics or technology to distinguish 
between interstate and intrastate components for purposes of sections 
251 and 252. We believe that this interpretation is the most reasonable 
one in light of our expectation that marketing and product offerings by 
telecommunications carriers will diminish or eliminate the significance 
of interstate-intrastate distinctions.
    62. We view sections 251 and 252 as creating parallel jurisdiction 
for the FCC and the states. These sections require the FCC to establish 
implementing rules to govern interconnection, resale of services, 
access to unbundled network elements, and other matters, and direct the 
states to follow the Act and those rules in arbitrating and approving 
arbitrated agreements under sections 251 and 252. Among other things, 
the fact that the Commission is required to assume the state 
commission's responsibilities if the state commission fails to carry 
out its section 252 responsibilities gives rise to the inevitable 
inference that both the states and the FCC are to address the same 
matters through their parallel jurisdiction over both interstate and 
intrastate matters under sections 251 and 252.
    63. The only other possible interpretations would be that: (1) 
sections 251 and 252 address only interstate aspects of 
interconnection, services, and access to unbundled elements; (2) the 
provisions address only the intrastate aspects of those issues; or (3) 
the FCC's role is to establish rules for interstate aspects, and the 
states' role is to arbitrate and approve agreements on intrastate 
aspects. As explained below, none of these interpretations withstands 
examination. Accordingly, we conclude that sections 251 and 252 address 
both interstate and intrastate aspects of interconnection services and 
access to unbundled elements.
    64. Some parties have argued that our authority under section 251 
is limited by section 2(b). Ordinarily, in light of section 2(b), we 
would interpret a provision of the Communications Act as addressing 
only the interstate jurisdiction unless the provision (as well as 
section 2(b) itself) provided otherwise. That interpretation is 
contradicted in this case, however, by strong evidence in the statute 
that the local competition provisions of the 1996 Act are directed to 
both intrastate and interstate matters. For example, section 251(c)(2), 
the interconnection requirement, requires LECs to provide 
interconnection ``for the transmission and routing of telephone 
exchange service and exchange access.'' Because telephone exchange 
service is a local, intrastate service, section 251(c)(2) plainly 
addresses intrastate service, but it also addresses interstate exchange 
access. In addition, we note that in section 253, the statute 
explicitly authorizes the Commission to preempt intrastate and 
interstate barriers to entry.
    65. More generally, if these sections are read to address only 
interstate services, the grant of substantial responsibilities to the 
states under section 252 is incongruous. A statute designed to develop 
a national policy framework to promote local competition cannot 
reasonably be read to reduce significantly the FCC's traditional 
jurisdiction over interstate matters by delegating enforcement 
responsibilities to the states, unless Congress intended also to 
implement its national policies by enhancing our authority to encompass 
rulemaking authority over intrastate interconnection matters. The 
legislative history is replete with statements indicating that Congress 
meant to address intrastate local exchange competition. For instance, 
Senator Lott stated that ``[i]n addressing local and long distance 
issues, creating an open access and sound interconnection policy was 
the key objective * * * '' 141 Cong. Rec. S7906 (June 7, 1995) 
(emphasis added). Representative Markey noted that ``we take down the 
barriers of local and long distance and cable company, satellite, 
computer software entry into any business they want to get in.'' 142 
Cong. Rec. H1151 (Feb. 1, 1996) (emphasis added).
    66. Some parties argue that section 251 addresses solely intrastate 
matters. We do not find this argument persuasive. Under this narrow 
view, section 251(c)(6) requiring incumbent LECs to offer physical 
collocation would apply only to equipment used for intrastate services, 
while new entrants would be limited to the use of virtual collocation 
for equipment used in the provision of interstate services, pursuant to 
the decision in Bell Atlantic. Bell Atlantic Telephone Companies v. 
FCC, 24 F.3d 1441 (D.C. Cir. 1994) (Bell Atlantic) (holding that the 
Commission did not have authority to require physical collocation for 
the provision of interstate services). Such an interpretation would 
force new entrants to use different methods of collocation based on the 
jurisdictional nature of the traffic involved, and would thereby 
greatly increase new entrants' costs. Moreover, such an interpretation 
would fail to give effect to Congress's intent in

[[Page 45490]]

enacting section 251(c)(6) to reverse the result reached in Bell 
Atlantic. The language in the House bill which closely matches the 
language that appears in section 251(c)(6), noted that a provision 
requiring physical collocation was necessary ``because a recent court 
decision indicates that the Commission lacks authority under the 
Communications Act to order physical collocation.'' H.R. Rep. No. 204, 
pt. I, 104th Cong., 1st Sess., at 73 (1995).
    67. Another factor that makes clear that sections 251 and 252 did 
not address exclusively intrastate matters is the provision in section 
251(g), ``Continued Enforcement of Exchange Access and Interconnection 
Requirements.'' That section provides that BOCs must follow the 
Commission's ``equal access and nondiscriminatory interconnection 
restrictions (including receipt of compensation)'' until they are 
explicitly superseded by Commission regulations after the date of 
enactment of the 1996 Act. This provision refers to existing Commission 
rules governing interstate matters, and therefore it contradicts the 
argument that section 251 addresses intrastate matters exclusively.
    68. Nor does the savings clause of section 251(i) require us to 
conclude that sections 251 and 252 address only intrastate issues. 
Section 251(i) provides that ``[n]othing in this section shall be 
construed to limit or otherwise affect the Commission's authority under 
section 201.'' This subsection merely affirms that the Commission's 
preexisting authority under section 201 continues to apply for purely 
interstate activities. It does not act as a limitation on the agency's 
authority under section 251.
    69. As to the third possible interpretation, the FCC's role is to 
establish rules for only the interstate aspects of interconnection, and 
the states' role is to arbitrate and approve only the intrastate 
aspects of interconnection agreements. No commenters support this 
position, and we find that it would be inconsistent with the 1996 Act 
to read into sections 251 and 252 such a distinction. The statute 
explicitly contemplates that the states are to comply with the 
Commission's rules, and the Commission is required to assume the state 
commission's responsibilities if the state commission fails to act to 
carry out its section 252 responsibilities. Thus, we believe the only 
logical conclusion is that the Commission and the states have parallel 
jurisdiction. We conclude, therefore, that these sections can only 
logically be read to address both interstate and intrastate aspects of 
interconnection, services, and access to unbundled network elements, 
and thus to grant the Commission authority to establish regulations 
under 251, binding on both carriers and states, for both interstate and 
intrastate aspects.
    70. Section 2(b) of the Act does not require a different 
conclusion. Section 2(b) provides that, except as provided in certain 
enumerated sections not including sections 251 and 252, ``nothing in 
[the 1934] Act shall be construed to apply or to give to the Commission 
jurisdiction with respect to * * * charges, classifications, practices, 
services, facilities, or regulations for or in connection with 
intrastate communication service by wire or radio of any carrier * * 
*''. As stated above, however, we have found that sections 251 and 252 
do apply to ``charges, classifications, practices, services, 
facilities, or regulations for or in connection with intrastate 
communication service.'' In enacting sections 251 and 252 after section 
2(b), and squarely addressing therein the issue of interstate and 
intrastate jurisdiction, we find that Congress intended for sections 
251 and 252 to take precedence over any contrary implications based on 
section 2(b). We note also, that in enacting the 1996 Act, there are 
other instances where Congress indisputably gave the Commission 
intrastate jurisdiction without amending section 2(b). For instance, 
section 251(e)(1) provides that ``[t]he Commission shall have exclusive 
jurisdiction over those portions of the North American Numbering Plan 
that pertain to the United States.'' Section 253 directs the FCC to 
preempt state regulations that prohibit the ability to provide 
intrastate services. Section 276(b) directs the Commission to 
``establish a per call compensation plan to ensure that payphone 
service providers are fairly compensated for each and every completed 
intrastate and interstate call.'' Section 276(d) provides that ``[t]o 
the extent that any State requirements are inconsistent with the 
Commission's regulations, the Commission's regulations on such matters 
shall preempt such State requirements.'' None of these provisions is 
specifically excepted from section 2(b), yet all of them explicitly 
give the FCC jurisdiction over intrastate matters. Thus, we believe 
that the lack of an explicit exception in section 2(b) should not be 
read to require an interpretation that the Commission's jurisdiction 
under sections 251 and 252 is limited to interstate services. A 
contrary holding would nullify several explicit grants of authority to 
the FCC, noted above, and would render parts of the statute 
meaningless.
    71. Some parties find significance in the fact that earlier drafts 
of the legislation would have amended section 2(b) to make an exception 
for Part II of Title II, including section 251, but the enacted version 
did not include that exception. These parties argue that this change in 
drafting demonstrates an intention by Congress that the limitations of 
section 2(b) remain fully in force with regard to sections 251 and 252. 
We find this argument unpersuasive.
    72. Parties that attach significance to the omission of the 
proposed amendment of section 2(b) rely on a rule of statutory 
construction providing that, when a provision in a prior draft is 
altered in the final legislation, Congress intended a change from the 
prior version. This rule of statutory construction has been rejected, 
however, when changes from one draft to another are not explained. In 
this instance, the only statement from Congress regarding the meaning 
of the omission of the section 2(b) amendment appears in the Joint 
Explanatory Statement of the Conference Report. According to the Joint 
Explanatory Statement, all differences between the Senate Bill, the 
House Amendment, and the substitute reached in conference are noted 
therein ``except for clerical corrections, conforming changes made 
necessary by agreements reached by the conferees, and minor drafting 
and clerical changes.'' Because the Joint Explanatory Statement did not 
address the removal of the section 2(b) amendment from the final bill, 
the logical inference is that Congress regarded the change as an 
inconsequential modification rather than a significant alteration. 
Moreover, it seems implausible that, by selecting the final version, 
Congress intended a radical alteration of the Commission's authority 
under section 251, given the total lack of legislative history to that 
effect. We conclude that elimination of the proposed amendment of 
section 2(b) was a nonsubstantive change because, as AT&T contends, 
such amendment was unnecessary in light of the grants of authority 
under sections 251 and 252, and would have had no practical effect.
    73. Some parties have argued that, to the extent that sections 251 
and 252 address intrastate matters, the Commission's rulemaking 
authority under those sections is limited to those instances where 
Commission action regarding intrastate matters is specifically 
mandated, such as number administration. We disagree. There is no 
language limiting the Commission's

[[Page 45491]]

authority to establish rules under section 251. To the contrary, 
section 251(d)(1) affirmatively requires Commission rules, stating that 
``the Commission shall complete all actions necessary to implement the 
requirements of this section.'' Pursuant to sections 4(i), 201(b), and 
303(r) of the Act, the Commission generally has rulemaking authority to 
implement all provisions of the Communications Act. Courts have held 
that the Commission, pursuant to its general rulemaking authority, has 
``expansive'' rather than limited powers. Further, where Congress has 
expressly delegated to the Commission rulemaking responsibility with 
respect to a particular matter, such delegation constitutes ``something 
more than the normal grant of authority permitting an agency to make 
ordinary rules and regulations * * *''. Indeed, to read these 
provisions otherwise would negate the requirement that states ensure 
that arbitrated agreements are consistent with the Commission's rules. 
Thus, the explicit rulemaking requirements pointed out by some of the 
parties is best read as giving the Commission more jurisdiction than 
usual, not less. We believe that the delegation of authority set forth 
in section 251(d)(1) is ``expansive'' and not limited. We therefore 
reject assertions that the Commission has authority to establish 
regulations regarding intrastate matters only with respect to certain 
provisions of section 251, such as number administration.
    74. Moreover, the Court in Louisiana PSC does not suggest a 
different result. The reasoning in Louisiana PSC applies to the dual 
regulatory system of the 1934 Act. As set forth above, however, in 
sections 251-253, Congress amended the dual regulatory system that the 
Court addressed in Louisiana PSC. As a result, preemption in this case 
is governed by the usual rule, also recognized in Louisiana PSC, that 
an agency, acting within the scope of its delegated authority, may 
preempt inconsistent state regulation. As discussed above, Congress 
here has expressed an intent that our rules apply to intrastate 
interconnection, services, and access to network elements. Therefore, 
Louisiana PSC does not foreclose our adoption of regulations under 
section 251 to govern intrastate matters.
    75. Parties have raised other arguments suggesting that the 
Commission lacks authority over intrastate matters. We are not 
persuaded by the argument that sections 256(c) and 261, as well as 
section 601(c) of the 1996 Act, evince an intent by Congress to 
preserve states' exclusive authority over intrastate matters. In fact, 
section 261 supports the finding that the Commission may establish 
regulations regarding intrastate aspects of interconnection, services 
and access to unbundled elements that the states may not supersede. 
Section 261(b) generally permits states to enforce regulations 
prescribed prior to the date of enactment of the 1996 Act, and to 
prescribe regulations after such date, if such regulations are not 
inconsistent with the provisions of Part II of Title II. Section 261(c) 
specifically provides that nothing in Part II of Title II ``precludes a 
State from imposing requirements on a telecommunications carrier for 
intrastate services that are necessary to further competition in the 
provision of telephone exchange service or exchange access, as long as 
the State's requirements are not inconsistent with this part or the 
Commission's regulations to implement this part.'' We conclude that 
state access and interconnection obligations referenced in section 
251(d)(3) fall within the scope of section 261(c). Section 261(c), as 
the more specific provision, controls over section 261(b) for matters 
that fall within its scope. We note, too, that section 261(c) 
encompasses all state requirements. It is not limited to requirements 
that were prescribed prior to the enactment of the 1996 Act. By 
providing that state requirements for intrastate services must be 
consistent with the Commission's regulations, section 261(c) buttresses 
our conclusion that the Commission may establish regulations regarding 
intrastate aspects of interconnection, services, and access to 
unbundled elements.
    76. Section 601 of the 1996 Act and section 256 also are consistent 
with our conclusion. Section 601(c) of the 1996 Act provides that the 
Act and its amendments ``shall not be construed to modify, impair, or 
supersede Federal, State, or local law unless expressly so provided in 
such Act or amendments.'' We conclude that section 251(d)(1), which 
requires the Commission to ``establish regulations to implement the 
requirements of this section,'' and section 261(c), were expressly 
intended to modify federal and state law and jurisdictional authority.
    77. Section 256, entitled ``Coordination for Interconnectivity,'' 
has no direct bearing on the issue of the Commission's authority under 
section 251, because it provides only that ``[n]othing in this section 
shall be construed as expanding or limiting any authority that the 
Commission may have under law in effect before the date of enactment of 
the Telecommunications Act of 1996.'' That provision is relevant, 
however, as a contrast to section 251, which does not contain a similar 
statement that the scope of the Commission's authority is unchanged by 
section 251. Russello v. United States, 464 U.S. 16, 23 (1983); Cramer 
v. Internal Revenue Service, 64 F.3d 1406, 1412 (9th Cir. 1995) (where 
Congress includes a provision in one section of statute but omits it in 
another section of the same Act, it should not be implied where it is 
excluded).
    78. We further conclude that the Commission's regulations under 
section 251 are binding on the states, even with respect to intrastate 
issues. Section 252 provides that the agreements state commissions 
arbitrate must comply with the Commission's regulations established 
pursuant to section 251. In addition, section 253 requires the 
Commission to preempt state or local regulations or requirements that 
``prohibit or have the effect of prohibiting the ability of any entity 
to provide any interstate or intrastate telecommunications service.'' 
As discussed above, section 261(c) provides further support for the 
conclusion that states are bound by the regulations the Commission 
establishes under section 251.
    79. We disagree with claims that section 251(d)(3) ``grandfathers'' 
existing state regulations that are consistent with the 1996 Act, and 
that such state regulations need not comply with the Commission's 
implementing regulations. Section 251(d)(3) only specifies that the 
Commission may not preclude enforcement of state access and 
interconnection requirements that are consistent with section 251, and 
that do not substantially prevent implementation of the requirements of 
section 251 or the purposes of Part II of Title II. In this Report and 
Order, we set forth only such rules that we believe are necessary to 
implement fully section 251 and the purposes of Part II of Title II. 
Thus, state regulations that are inconsistent with our rules may 
``substantially prevent implementation of the requirements of this 
section and the purposes of [Part II of Title II].''
    80. We are not persuaded by arguments that, because other 
provisions of the 1996 Act specifically require states to comply with 
the Commission's regulations, the absence of such requirement in 
section 251(d)(3) indicates that Congress did not intend such 
compliance. Section 251(d)(3) permits states to prescribe and to 
enforce access and interconnection requirements only to the extent that 
such requirements ``are consistent with the requirements'' of section 
251 and do not ``substantially prevent

[[Page 45492]]

implementation'' of the requirements of section 251 and the purposes of 
Part II of Title II. The Commission is required to establish 
regulations to ``implement the requirements of the section.'' 
Therefore, in order to be consistent with the requirements of section 
251 and not ``substantially prevent'' implementation of section 251 or 
Part II of Title II, state requirements must be consistent with the 
FCC's implementing regulations.

D. Commission's Legal Authority and the Adoption of National Pricing 
Rules

1. Background
    81. In the NPRM, we sought comment on our tentative conclusion that 
sections 251 (c)(2), (c)(3), and (c)(6) establish the Commission's 
legal authority under section 251(d) to adopt pricing rules to ensure 
that the rates, terms, and conditions for interconnection, access to 
unbundled network elements, and collocation are just, reasonable, and 
nondiscriminatory. We also sought comment on our tentative conclusion 
that sections 251(b)(5) and 251(c)(4) establish our authority to define 
``wholesale rates'' for purposes of resale, and ``reciprocal 
compensation arrangements'' for purposes of transport and termination 
of telecommunications services. In addition, we asked parties to 
comment on our tentative conclusion that the Commission's statutory 
duty to implement the pricing requirements of section 251, as 
elaborated in section 252, requires that we establish pricing rules 
interpreting and further explaining the provisions of section 252(d). 
The states would then apply these rules in establishing rates pursuant 
to arbitrations and in reviewing BOC statements of generally available 
terms and conditions.
    82. We further sought comment on our tentative conclusion that 
national pricing rules would likely reduce or eliminate inconsistent 
state regulatory requirements, increase the predictability of rates, 
and facilitate negotiation, arbitration, and review of agreements 
between incumbent LECs and competitive providers. We also sought 
comment on the potential consequences of the Commission not 
establishing specific pricing rules.
2. Discussion
    83. In adopting sections 251 and 252, we conclude that Congress 
envisioned complementary and significant roles for the Commission and 
the states with respect to the rates for section 251 services, 
interconnection, and access to unbundled elements. We interpret the 
Commission's role under section 251 as ensuring that rates are just, 
reasonable, and nondiscriminatory: in doing so, we believe it to be 
within our discretion to adopt national pricing rules in order to 
ensure that rates will be just, reasonable, and nondiscriminatory. The 
Commission is also responsible for ensuring that interconnection, 
collocation, access to unbundled elements, resale services, and 
transport and termination of telecommunications are reasonably 
available to new entrants. The states' role under section 252(c) is to 
establish specific rates when the parties cannot agree, consistent with 
the regulations prescribed by the Commission under sections 251(d)(1) 
and 252(d).
    84. While we recognize that sections 201 and 202 create a very 
different regulatory regime from that envisioned by sections 251 and 
252, we observe that Congress used terms in section 251, such as the 
requirement that rates, terms, and conditions be ``just, reasonable, 
and nondiscriminatory,'' that are very similar to language in sections 
201 and 202. This lends additional support for the proposition that 
Congress intended to give us authority to adopt rules regarding the 
justness and reasonableness of rates pursuant to section 251, 
comparable in some respects to the authority Congress gave us pursuant 
to sections 201 and 202.
    85. We believe that national pricing rules are a critical component 
of the interconnection regime set out in sections 251 and 252. Congress 
intended these sections to promote opportunities for local competition, 
and directed us to establish regulations to ensure that rates under 
this regime would be economically efficient. This, in turn, should 
reduce potential entrants' capital costs, and should facilitate entry 
by all types of service providers, including small entities. Further, 
we believe that national rules will help states review and arbitrate 
contested agreements in a timely fashion. From August to November and 
beyond, states will be carrying the tremendous burden of setting 
specific rates for interconnection and network elements, for resale, 
and for transport and termination when parties bring these issues 
before them for arbitration. As discussed in more detail below, we are 
setting forth default proxies for states to use if they are unable to 
set these rates using the necessary cost studies within the statutory 
time frame. After that, both we and the states will need to review the 
level of competition, revise our rules as necessary, and reconcile 
arbitrated interconnection arrangements to those revisions on a going-
forward basis.
    86. We believe that national rules should reduce the parties' 
uncertainty about the outcome that may be reached by different states 
in their respective regulatory proceedings, which will reduce 
regulatory burdens for all parties including small incumbent LECs and 
small entities. A national regime should also help to ensure consistent 
federal court decisions on review of specific state orders under 
sections 251 and 252. In addition, under the national pricing rules 
that we adopt for interconnection and unbundled network elements, 
states will retain the flexibility to consider local technological, 
environmental, regulatory, and economic conditions. Failure to adopt 
national pricing rules, on the other hand, could lead to widely 
disparate state policies that could delay the consummation of 
interconnection arrangements and otherwise hinder the development of 
local competition. Lack of national rules could also provide 
opportunities for incumbent LECs to inhibit or delay the 
interconnection efforts of new competitors, and create great 
uncertainty for the industry, capital markets, regulators, and courts 
as to what pricing policies would be pursued by each of the individual 
states, frustrating the potential entrants' ability to raise capital. 
In sum, we believe that the pricing of interconnection, unbundled 
elements, resale, and transport and termination of telecommunications 
is important to ensure that opportunities to compete are available to 
new entrants.
    87. As we observed in the NPRM, section 251 explicitly sets forth 
certain requirements regarding rates for interconnection, access to 
unbundled elements, and related offerings. Sections 251 (c)(2) and 
(c)(3) require that incumbent LECs' ``rates, terms, and conditions'' 
for interconnection and unbundled network elements be ``just, 
reasonable, and nondiscriminatory in accordance with * * * the 
requirements of sections 251 and 252.'' Section 251(c)(4) requires that 
incumbent LECs offer ``for resale at wholesale rates any 
telecommunications service that the carrier provides at retail to 
subscribers who are not telecommunications carriers,'' without 
unreasonable conditions or limitations. Section 251(c)(6) provides that 
all LECs must provide physical collocation of equipment, ``on rates, 
terms, and conditions that are just, reasonable, and 
nondiscriminatory.'' Section 251(b)(5) requires that all LECs 
``establish reciprocal compensation arrangements for the transport and 
termination of telecommunications.'' Section 251(d)(1) further 
expressly directs the

[[Page 45493]]

Commission, without limitation, to ``complete all actions necessary to 
implement the requirements of [section 251].''
    88. Section 252 generally sets forth the procedures that state 
commissions, incumbent LECs, and new entrants must follow to implement 
the requirements of section 251 and establish specific interconnection 
arrangements. Section 252(c)(1) provides that ``in resolving by 
arbitration * * * any open issues and imposing conditions upon the 
parties to the agreement, a State commission shall * * * ensure that 
such resolution and conditions meet the requirements of section 251, 
including the regulations prescribed by the Commission pursuant to 
section 251.''
    89. We conclude that, under section 251(d)(1), Congress granted us 
broad authority to complete all actions necessary to implement the 
requirements of section 251, including actions necessary to ensure that 
rates for interconnection, access to unbundled elements, and 
collocation are ``just, reasonable, and nondiscriminatory.'' We also 
determine that the statute grants us the authority to define reasonable 
``wholesale rates'' for purposes of services to be resold, and 
``reciprocal compensation'' for purposes of transport and termination 
of telecommunications. The argument advanced by the New York 
Commission, NARUC, and others that the Commission's implementing 
authority under section 251(d)(1) is limited to those provisions in 
section 251 that mandate specific Commission rules, such as prescribing 
regulations for number portability, unbundling, and resale, reads into 
section 251(d)(1) limiting language that the section does not contain. 
Congress did not confine the Commission's rulemaking authority to only 
those matters identified in sections 251(b)(2), 251(c)(4)(B), and 
251(d)(2), and there is no basis for inferring such an implicit 
limitation. A narrow reading of section 251(d)(1), as proposed by the 
New York Commission, NARUC, and others, would require the Commission to 
neglect its statutory duty to implement the provisions of section 251 
and to promote rapid competitive entry into local telephone markets.
    90. We also reject the arguments raised by several state 
commissions that the language in section 252(c) indicates Congress' 
intent for the Commission to have little or no authority with respect 
to pricing of interconnection, access to unbundled elements, and 
collocation. We do not believe that the statutory directive that state 
commissions establish rates according to section 252(d) restricts our 
authority under section 251(d)(1). States must comply with both the 
statutory standards under section 252(d) and the regulations prescribed 
by the Commission pursuant to section 251 when arbitrating rate 
disputes or when reviewing BOC statements of generally available terms. 
Section 252(c) enumerates three requirements that states must follow in 
arbitrating issues. These requirements are not set forth in the 
alternative; rather, states must comply with all three.
    91. We further reject the argument that section 251(d)(3) restricts 
the Commission's authority to establish national pricing regulations. 
Section 251(d)(3) provides that the Commission shall not preclude the 
enforcement of any regulation, order, or policy of a state commission 
that, inter alia, is consistent with the requirements of section 251 
and does not substantially prevent implementation of the requirements 
of section 251. This subsection, as discussed in section II.C., supra, 
is intended to allow states to adopt regulations that are not 
inconsistent with the Commission's rules; it does not address state 
policies that are inconsistent with the pricing rules established by 
the Commission.
    92. We also address the impact of our rules on small incumbent 
LECs. For example, Rural Tel. Coalition argues that rigid rules, based 
on the properties of large urban LECs, cannot blindly be applied to 
small and rural LECs. As discussed above, however, we believe that 
states will retain sufficient flexibility under our rules to consider 
local technological, environmental, regulatory, and economic 
conditions. We also note that section 251(f) may provide relief to 
certain small carriers.

E. Authority To Take Enforcement Action

1. Background
    93. The Commission's implementation of section 251 must be given 
full effect in arbitrated agreements and incorporated into all such 
agreements. There is judicial review of such arbitrated agreements, and 
one issue surely will be the adherence of these agreements to our 
rules. The Commission will have the opportunity to participate, upon 
request by a party or a state or by submitting an amicus filing, in the 
arbitration or the judicial review thereof. To clarify our potential 
role, we consider the extent of the Commission's authority to review 
and enforce agreements entered into pursuant to section 252. Section 
252(e)(6) provides that, in ``any case in which a State commission 
makes a determination under this section, any party aggrieved by such 
determination may bring an action in an appropriate Federal district 
court to determine whether the agreement or statement meets the 
requirements of section 251 and this section.''
    94. In the NPRM, we sought comment on the relationship between 
sections 251 and 252 and the Commission's existing authority under 
section 208(a), which allows any person to file a complaint with the 
Commission regarding ``anything done or omitted to be done by any 
common carrier subject to this Act, in contravention of the provisions 
thereof * * *'' We asked whether section 208 gives the Commission 
authority over complaints alleging violations of requirements set forth 
in sections 251 or 252. We also sought comment on the relationship 
between sections 251 and 252 and any other applicable Commission 
enforcement authority. We further sought comment on how we might 
increase the effectiveness of the Commission's enforcement mechanisms. 
Specifically, we asked for comment on how private rights of action 
might be used under the Act, and the Commission's role in speeding 
dispute resolution in forums used by private parties.
2. Discussion
    95. Consistent with our decision in Telephone Number Portability 
and the views of most commenters, we conclude that parties have several 
options for seeking relief if they believe that a carrier has violated 
the standards under section 251 or 252. Pursuant to section 252(e)(6), 
a party aggrieved by a state commission arbitration determination under 
section 252 has the right to bring an action in federal district court. 
Commenters also suggest that the statute's provision for federal 
district court review of state public utility commission decisions is 
inconsistent with the 11th Amendment. That issue is not properly before 
the Commission since it is the federal courts that will have to 
determine the scope of their jurisdiction and in any case ``regulatory 
agencies are not free to declare an act of Congress unconstitutional.'' 
See Meredith Corp. versus FCC, 809 F.2d 863, 873 (D.C. Cir. 1987). 
Federal district courts may choose to stay or dismiss proceedings 
brought pursuant to section 252(e)(6), and refer issues of compliance 
with the substantive requirements of sections 251 and 252 to the 
Commission under the primary jurisdiction doctrine. We find, however, 
that federal court review is not the exclusive remedy regarding state 
determinations under section 252. The

[[Page 45494]]

1996 Act is clear when it intends for a remedy to be exclusive. For 
example, section 252(e)(6) provides that, if a state commission fails 
to act, as described in section 252(e)(5), ``the proceeding by the 
Commission under [section 252(e)(5)] and any judicial review of the 
Commission's actions shall be the exclusive remedies for a State 
commission's failure to act.'' In contrast, the succeeding sentence in 
section 252(e)(6) provides that any party aggrieved by a state 
commission determination under section 252 ``may bring an action in an 
appropriate Federal district court * * *''
    96. The Commission also stands ready to provide guidance to states 
and other parties regarding the statute and our rules. In addition to 
the informal consultations that we hope to continue with state 
commissions, they or other parties may at any time seek a declaratory 
ruling where necessary to remove uncertainty or eliminate a 
controversy. See 47 CFR Sec. 1.2 (the Commission, in accordance with 
section 5(d) of the Administrative Procedures Act, 5 U.S.C. 
Sec. 554(e), may issue a declaratory ruling terminating a controversy 
or removing uncertainty). Because section 251 is critical to the 
development of competitive local markets, we intend to act 
expeditiously on such requests for declaratory rulings.
    97. We further conclude that section 252(e)(6) does not divest the 
Commission of jurisdiction, in whole or in part, over complaints that a 
common carrier violated section 251 or 252 of the Act. Section 
601(c)(1) of the 1996 Act provides that the 1996 Act ``shall not be 
construed to modify, impair or supersede'' existing federal law--which 
includes the section 208 complaint process--``unless expressly so 
provided.'' Sections 251 and 252 do not divest the Commission of its 
section 208 complaint authority.
    98. An aggrieved party could file a section 208 complaint with the 
Commission, alleging that the incumbent LEC or requesting carrier has 
failed to comply with the requirements of sections 251 and 252, 
including Commission rules thereunder, even if the carrier is in 
compliance with an agreement approved by the state commission. 
Alternatively, a party could file a section 208 complaint alleging that 
a common carrier is violating the terms of a negotiated or arbitrated 
agreement. We plan to initiate a proceeding to adopt expedited 
procedures for resolving complaints filed pursuant to section 208.
    99. We note that, in acting on a section 208 complaint, we would 
not be directly reviewing the state commission's decision, but rather, 
our review would be strictly limited to determining whether the common 
carrier's actions or omissions were in contravention of the 
Communications Act. While we would have authority to review such 
complaints, we note that we might decline, at least in some instances, 
to impose financial penalties upon a common carrier that is acting 
pursuant to state requirements or authorization, even if we sustain the 
allegations in the complaint. Thus, consistent with our past decisions 
in analogous contexts (See Number Portability Order, supra; Freemon 
versus AT&T, 59 FR 43125 (August 22, 1994) (provision permitting 
persons aggrieved by violation of prohibition against unauthorized 
publication of certain communications to ``bring a civil action in 
United States district court or any other court of competent 
jurisdiction'' did not bar a complaint under section 208 of the 
Communications Act); see also Policies Governing the Provision of 
Shared Telecommunications Service, 54 FR 478 (January 6, 1989) (the 
section 208 complaint process is available to resolve any specific 
problems that might arise regarding shared telecommunications service 
regulation by a state that impinges upon a federal interest)), we 
conclude that a person aggrieved by a state determination under 
sections 251 and 252 of the Act may elect to either bring an action for 
federal district court review or a section 208 complaint to the 
Commission against a common carrier. Such a person could, as a further 
alternative, pursuant to section 207, file a complaint against a common 
carrier with the Commission or in federal district court for the 
recovery of damages. We are unlikely, in adjudicating a complaint, to 
examine the consistency of a state decision with sections 251 and 252 
if a judicial determination has already been made on the issues before 
us.
    100. Finally, we clarify, as one commenter requested, that nothing 
in sections 251 and 252 of our implementing regulations is intended to 
limit the ability of persons to seek relief under the antitrust laws, 
other statutes, or common law. In addition, in appropriate 
circumstances, the Commission could institute an inquiry on its own 
motion, 47 U.S.C. Sec. 403, initiate a forfeiture proceeding, 47 U.S.C. 
Sec. 503(b), initiate a cease-and-desist proceeding, 47 U.S.C. 
Sec. 312(b), or in extreme cases, consider initiating a revocation 
proceeding for violators with radio licenses, 47 U.S.C. Sec. 312(a), or 
referring violations to the Department of Justice for possible criminal 
prosecution under 47 U.S.C. Sec. 501, 502 & 503(a).

F. Regulations of BOC Statements of Generally Available Terms

    101. We noted in the NPRM that section 251 and our implementing 
regulations govern the states' review of BOC statements of generally 
available terms and conditions, as well as arrangements reached through 
compulsory arbitration pursuant to section 252(b). We tentatively 
concluded that we should adopt a single set of standards with which 
both arbitrated agreements and BOC statements of generally available 
terms must comply.
    102. Only a few commenters addressed this issue, and most concurred 
with the tentative conclusion that we should apply the same 
requirements to both arbitrated agreements and BOC statements of 
generally available terms. The Illinois Commission, for example, 
asserts that, ``[s]ince the generally available terms could be viewed 
as a baseline against which to craft arbitrated arrangements, it is 
reasonable to hold both arbitrated agreements and the BOC statements of 
generally available terms to the same standards.'' CompTel asserts 
that, particularly if states require incumbent LECs to tariff the terms 
and conditions in agreements that are subject to arbitration, there 
will be few if any distinctions between arbitrated agreements and 
generally available terms and conditions.
    103. We hereby find that our tentative conclusion that we should 
apply a single set of standards to both arbitrated agreements and BOC 
statements of generally available terms is consistent with both the 
text and purpose of the 1996 Act. BOC statements of generally available 
terms are relevant where a BOC seeks to provide in-region interLATA 
service, and the BOC has not negotiated or arbitrated an agreement. 
Therefore, such statements are to some extent a substitute for an 
agreement for interconnection, services, or access to unbundled 
elements. We also find no basis in the statute for establishing 
different requirements for arbitrated agreements and BOC statements of 
generally available terms. Moreover, a single set of requirements will 
substantially ease the burdens of state commissions and the FCC in 
reviewing agreements and statements of generally available terms 
pursuant to sections 252 and 271.

[[Page 45495]]

G. States' Role in Fostering Local Competition Under Sections 251 and 
252

    104. As already referenced, states will play a critical role in 
promoting local competition, including by taking a key role in the 
negotiation and arbitration process. We believe the negotiation/
arbitration process pursuant to section 252 is likely to proceed as 
follows. Initially, the requesting carrier and incumbent LEC will seek 
to negotiate mutually agreeable rates, terms, and conditions governing 
the competing carrier's interconnection to the incumbent's network, 
access to the incumbent's unbundled network elements, or the provision 
of services at wholesale rates for resale by the requesting carrier. 
Either party may ask the relevant state commission to mediate specific 
issues to facilitate an agreement during the negotiation process.
    105. Because the new entrant's objective is to obtain the services 
and access to facilities from the incumbent that the entrant needs to 
compete in the incumbent's market, the negotiation process contemplated 
by the 1996 Act bears little resemblance to a typical commercial 
negotiation. Indeed, the entrant has nothing that the incumbent needs 
to compete with the entrant, and has little to offer the incumbent in a 
negotiation. Consequently, the 1996 Act provides that, if the parties 
fail to reach agreement on all issues, either party may seek 
arbitration before a state commission. The state commission will 
arbitrate individual issues specified by the parties, or conceivably 
may be asked to arbitrate the entire agreement. In the event that a 
state commission must act as arbitrator, it will need to ensure that 
the arbitrated agreement is consistent with the Commission's rules. In 
reviewing arbitrated and negotiated agreements, the state commission 
may ensure that such agreements are consistent with applicable state 
requirements.
    106. Under the statutory scheme in sections 251 and 252, state 
commissions may be asked by parties to define specific terms and 
conditions governing access to unbundled elements, interconnection, and 
resale of services beyond the rules the Commission establishes in this 
Report and Order. Moreover, the state commissions are responsible for 
setting specific rates in arbitrated proceedings. For example, state 
commissions in an arbitration would likely designate the terms and 
conditions by which the competing carrier receives access to the 
incumbent's loops. The state commission might arbitrate a description 
or definition of the loop, the term for which the carrier commits to 
the purchase of rights to exclusive use of a specific network element, 
and the provisions under which the competing carrier will order loops 
from the incumbent and the incumbent will provision an order. The state 
commission may establish procedures that govern should the incumbent 
refurbish or replace the element during the agreement period, and the 
procedures that apply should an end user customer decide to switch from 
the competing carrier back to the incumbent or a different provider. In 
addition, the state commission will establish the rates an incumbent 
charges for loops, perhaps with volume and term discounts specified, as 
well as rates that carriers may charge to end users.
    107. State commissions will have similar responsibilities with 
respect to other unbundled network elements such as the switch, 
interoffice transport, signalling and databases. State commissions may 
identify network elements to be unbundled, in addition to those 
elements identified by the Commission, and may identify additional 
points at which incumbent LECs must provide interconnection, where 
technically feasible. State commissions are responsible for determining 
when virtual collocation may be provided instead of physical 
collocation, pursuant to section 251(c)(6). States also will determine, 
in accordance with section 251(f)(1), whether and to what extent a 
rural incumbent LEC is entitled to continued exemption from the 
requirements of section 251(c) after a telecommunications carrier has 
made a bona fide request under section 251. Under section 251(f)(2), 
states will determine whether to grant petitions that may be filed by 
certain LECs for suspension or modification of the requirements in 
sections 251 (b) or (c).
    108. The foregoing is a representative sampling of the role that 
states will have in steering the course of local competition. State 
commissions will make critical decisions concerning a host of issues 
involving rates, terms, and conditions of interconnection and 
unbundling arrangements, and exemption, suspension, or modification of 
the requirements in section 251. The actions taken by a state will 
significantly affect the development of local competition in that 
state. Moreover, actions in one state are likely to influence other 
states, and to have a substantial impact on steps the FCC takes in 
developing a pro-competitive national policy framework.

III. Duty to Negotiate in Good Faith

A. Background

    109. Section 251(c)(1) of the statute imposes on incumbent LECs the 
``duty to negotiate in good faith in accordance with section 252 the 
particular terms and conditions of agreements to fulfill the duties 
described'' in sections 251(b) and (c), and further provides that 
``(t)he requesting telecommunications carrier also has the duty to 
negotiate in good faith the terms and conditions of such agreements.'' 
In the NPRM, we asked parties to comment on the extent to which the 
Commission should establish national rules defining the requirements of 
the good faith negotiation obligation.

B. Advantages and Disadvantages of National Rules

1. Discussion
    110. We conclude that establishing some national standards 
regarding the duty to negotiate in good faith could help to reduce 
areas of dispute and expedite fair and successful negotiations, and 
thereby realize Congress' goal of enabling swift market entry by new 
competitors. In order to address the balance of the incentives between 
the bargaining parties, however, we believe that we should set forth 
some minimum requirements of good faith negotiation that will guide 
parties and state commissions. As discussed above, the requirements in 
section 251 obligate incumbent LECs to provide interconnection to 
competitors that seek to reduce the incumbent's subscribership and 
weaken the incumbent's dominant position in the market. Generally, the 
new entrant has little to offer the incumbent. Thus, an incumbent LEC 
is likely to have scant, if any, economic incentive to reach agreement. 
In addition, incumbent LECs argue that requesting carriers may have 
incentives to make unreasonable demands or otherwise fail to act in 
good faith. The fact that an incumbent LEC has superior bargaining 
power does not itself demonstrate a lack of good faith, or ensure that 
a new entrant will act in good faith.
    111. We agree with commenters that it would be futile to try to 
determine in advance every possible action that might be inconsistent 
with the duty to negotiate in good faith. As discussed more fully 
below, determining whether or not a party's conduct is consistent with 
its statutory duty will depend largely on the specific facts of 
individual negotiations. Therefore, we believe that it is appropriate 
to identify factors or practices that may be evidence of failure to 
negotiate in good faith, but

[[Page 45496]]

that will need to be considered in light of all relevant circumstances.
    112. Consistent with our discussion in Section II, above, we 
believe that the Commission has authority to review complaints alleging 
violations of good faith negotiation pursuant to section 208. We 
previously have held that parties may raise allegations regarding good 
faith negotiation pursuant to section 208. Cellular Interconnection 
Proceeding, 4 FCC Rcd 2369 (1989). The Commission also held in that 
case that ``the conduct of good faith negotiations is not 
jurisdictionally severable.'' Id. at 2371. Penalties may be imposed 
under sections 501, 502 and 503 for failure to negotiate in good faith. 
In addition, we believe that state commissions have authority, under 
section 252(b)(5), to consider allegations that a party has failed to 
negotiate in good faith. We also reserve the right to amend these rules 
in the future as we obtain more information regarding negotiations 
under section 252.

C. Specific Practices That May Constitute a Failure to Negotiate in 
Good Faith

1. Discussion
    113. The Uniform Commercial Code defines ``good faith'' as 
``honesty in fact in the conduct of the transaction concerned.'' U.C.C. 
Sec. 1-201(19) (1981); see also Black's Law Dictionary at 353 (Abridged 
ed. 1983) (``Good faith is an intangible and abstract quality with no 
technical meaning or statutory definition, and it encompasses, among 
other things, an honest belief, the absence of malice, and the absence 
of design to defraud or to seek an unconscionable advantage * * *''). 
When looking at good faith, the question ``is a narrow one focused on 
the subjective intent with which the person in question has acted.'' 
U.C.C. Sec. 1-201 (84). Even where there is no specific duty to 
negotiate in good faith, certain principles or standards of conduct 
have been held to apply. Steven J. Burton and Eric G. Anderson, 
Contractual Good Faith, Sec. 8.2.2 at 332 (1995). For example, parties 
may not use duress or misrepresentation in negotiations. Thus, the duty 
to negotiate in good faith, at a minimum, prevents parties from 
intentionally misleading or coercing parties into reaching an agreement 
they would not otherwise have made. We conclude that intentionally 
obstructing negotiations also would constitute a failure to negotiate 
in good faith, because it reflects a party's unwillingness to reach 
agreement.
    114. Because section 252 permits parties to seek mediation ``at any 
point in the negotiation,'' and also allows parties to seek arbitration 
as early as 135 days after an incumbent LEC receives a request for 
negotiation under section 252, we conclude that Congress specifically 
contemplated that one or more of the parties may fail to negotiate in 
good faith, and created at least one remedy in the arbitration process. 
Section 252(b)(4)(C) requires state commissions to ``conclude the 
resolution of any unresolved issues not later than 9 months after the 
date on which the local exchange carrier received the request under 
this section.'' 47 U.S.C. Sec. 252(b)(4)(C). The possibility of 
arbitration itself will facilitate good faith negotiation. For example, 
parties seeking to avoid a legitimate accusation of breach of the duty 
of good faith in negotiation will work to provide their negotiating 
adversary all relevant information--given that section 252(b)(4)(B) 
authorizes the state commission to require the parties ``to provide 
such information as may be necessary for the State commission to reach 
a decision on the unresolved issues.'' That provision also states that, 
if either party ``fails unreasonably to respond on a timely basis to 
any reasonable request from the State commission, then the State 
commission may proceed on the basis of the best information available 
to it from whatever source derived.'' The likelihood that an arbitrator 
will review the positions taken by the parties during negotiations also 
should discourage parties from refusing unreasonably to provide 
relevant information to each other or to delay negotiations.
    115. We believe that determining whether a party has acted in good 
faith often will need to be decided on a case-by-case basis by state 
commissions or, in some instances the FCC, in light of all the facts 
and circumstances underlying the negotiations. This is consistent with 
earlier Commission decisions. See Amendment to the Commission's Rules 
Regarding a Plan for Sharing the Costs of Microwave Relocation, WT 
Docket 95-157, First Report and Order, FCC 96-196, at para. 20, 61 FR 
24470 (May 15, 1996). In light of these considerations, we set forth 
some minimum standards that will offer parties guidance in determining 
whether they are acting in good faith, but leave specific 
determinations of whether a party has acted in good faith to be decided 
by a state commission, court, or the FCC on a case-by-case basis.
    116. We find that there may be pro-competitive reasons for parties 
to enter into nondisclosure agreements. A broad range of commenters, 
including IXCs, state commissions, and incumbent LECs, support this 
view. We conclude that there can be nondisclosure agreements that would 
not constitute a violation of the good faith negotiation duty, but we 
caution that overly broad, restrictive, or coercive nondisclosure 
requirements may well have anticompetitive effects. We therefore will 
not prejudge whether a party has demonstrated a failure to negotiate in 
good faith by requesting another party to sign a nondisclosure 
agreement, or by failing to sign a nondisclosure agreement; such 
demands by incumbents, however, are of concern and any complaint 
alleging such tactics should be evaluated carefully. Agreements may 
not, however, preclude a party from providing information requested by 
the FCC, a state commission, or in support of a request for arbitration 
under section 252(b)(2)(B).
    117. We reject the general contention that a request by a party 
that another party limit its legal remedies as part of a negotiated 
agreement will in all cases constitute a violation of the duty to 
negotiate in good faith. A party may voluntarily agree to limit its 
legal rights or remedies in order to obtain a valuable concession from 
another party. In some circumstances, however, a party may violate this 
statutory provision by demanding that another waive its legal rights. 
For example, we agree with ALTS' contention that an incumbent LEC may 
not demand that the requesting carrier attest that the agreement 
complies with all provisions of the 1996 Act, federal regulations, and 
state law, because such a demand would be at odds with the provisions 
of sections 251 and 252 that are intended to foster opportunities for 
competition on a level playing field. In addition, we find that it is a 
per se failure to negotiate in good faith for a party to refuse to 
include in an agreement a provision that permits the agreement to be 
amended in the future to take into account changes in Commission or 
state rules. Refusing to permit a party to include such a provision 
would be tantamount to forcing a party to waive its legal rights in the 
future.
    118. We decline to find that other practices identified by parties 
constitute per se violations of the duty to negotiate in good faith. 
Time Warner contends that we should find that a party is not 
negotiating in good faith under section 252 if it seeks to tie 
resolution of issues in that negotiation to the resolution of other, 
unrelated disputes between the parties in another proceeding. On its 
face, the hypothetical practice raises concerns. Time Warner, however, 
did

[[Page 45497]]

not present specific examples of how linking two independent 
negotiation proceedings would undermine good faith negotiations. We 
believe that requesting carriers have certain rights under sections 251 
and 252, and those rights may not be derogated by an incumbent LEC 
demanding quid pro quo concessions in another proceeding. Parties, 
however, could mutually agree to link section 252 negotiations to 
negotiations on a separate matter. In fact, to the extent that 
concurrent resolution of issues could offer more potential solutions or 
may equalize the bargaining power between the parties, such action may 
be pro-competitive. For example, an incumbent LEC that offers video 
programming may be negotiating for the right to use video programming 
owned by a cable company while the cable company is negotiating terms 
for interconnecting with the incumbent LEC. Addressing some or all of 
the issues in the two negotiations collectively could expand the 
options for reaching agreement, and would equalize the parties' 
bargaining power, because each has something that the other party 
desires.
    119. We agree with parties contending that actions that are 
intended to delay negotiations or resolution of disputes are 
inconsistent with the statutory duty to negotiate in good faith. The 
Commission will not condone any actions that are deliberately intended 
to delay competitive entry, in contravention of the statute's goals. We 
agree with SCBA that small entities seeking to enter the market may be 
particularly disadvantaged by delay. However, whether a party has 
failed to negotiate in good faith by employing unreasonable delaying 
tactics must be determined on a specific, case-by-case basis. For 
example, a party may not refuse to negotiate with a requesting 
telecommunications carrier, and a party may not condition negotiation 
on a carrier first obtaining state certification. A determination based 
upon the intent of a party, however, is not susceptible to a 
standardized rule. If a party refuses throughout the negotiation 
process to designate a representative with authority to make binding 
representations on behalf of the party, and thereby significantly 
delays resolution of issues, such action would constitute failure to 
negotiate in good faith. The Commission has reached a consistent 
conclusion in other instances. See, e.g., Application of Gross 
Telecasting, Inc., 57 FR 18857 (May 1, 1992); Public Notice, FCC Asks 
for Comments Regarding the Establishment of an Advisory Committee to 
Negotiate Proposed Regulations, 57 FR 18857 (May 1, 1992). In 
particular, we believe that designating a representative authorized to 
make binding representations on behalf of a party will assist small 
entities and small incumbent LECs by centralizing communications and 
thereby facilitating the negotiation process. On the other hand, it is 
unreasonable to expect an agent to have authority to bind the principal 
on every issue--i.e., a person may reasonably be an agent of limited 
authority.
    120. We agree with incumbent LECs and new entrants that contend 
that the parties should be required to provide information necessary to 
reach agreement. See National Labor Relations Board v. Truitt Mfg Co., 
351 U.S. 149, 153 (1956) (the trier of fact can reasonably conclude 
that a party lacks good faith if it raises assertions about inability 
to pay without making the slightest effort to substantiate that claim); 
see also Microwave Facilities Operating in 1850-1990 MHz (2GHz) Band, 
61 FR 29679, 29689 (June 12, 1996). Parties should provide information 
that will speed the provisioning process, and incumbent LECs must prove 
to the state commission, or in some instances the Commission or a 
court, that delay is not a motive in their conduct. Review of such 
requests, however, must be made on a case-by-case basis to determine 
whether the information requested is reasonable and necessary to 
resolving the issues at stake. It would be reasonable, for example, for 
a requesting carrier to seek and obtain cost data relevant to the 
negotiation, or information about the incumbent's network that is 
necessary to make a determination about which network elements to 
request to serve a particular customer. It would not appear to be 
reasonable, however, for a carrier to demand proprietary information 
about the incumbent's network that is not necessary for such 
interconnection. This is consistent with previous FCC determinations. 
See, e.g., Amendment of Rules and Policies Governing the Attachment of 
Cable Television Hardware to Utility Poles, 4 FCC Rcd 468 (1989) (good 
faith negotiations necessitate that, at a minimum, one party must 
approach the other with a specific request). We conclude that an 
incumbent LEC may not deny a requesting carrier's reasonable request 
for cost data during the negotiation process, because we conclude that 
such information is necessary for the requesting carrier to determine 
whether the rates offered by the incumbent LEC are reasonable. We find 
that this is consistent with Congress' intention for parties to use the 
voluntary negotiation process, if possible, to reach agreements. On the 
other hand, the refusal of a new entrant to provide data about its own 
costs does not appear on its face to be unreasonable, because the 
negotiations are not about unbundling or leasing the new entrants' 
networks.
    121. We also find that incumbent LECs may not require requesting 
carriers to satisfy a ``bona fide request'' process as part of their 
duty to negotiate in good faith. Some of the information that incumbent 
LECs propose to include in a bona fide request requirement may be 
legitimately demanded from the requesting carrier; some of the proposed 
requirements, on the other hand, exceed the scope of what is necessary 
for the parties to reach agreement, and imposing such requirements may 
discourage new entry. For example, parties advocate that a ``bona fide 
request'' requirement should require requesting carriers to commit to 
purchase services or facilities for a specified period of time. We 
believe that forcing carriers to make such a commitment before critical 
terms, such as price, have been resolved is likely to impede new entry. 
Moreover, we note that section 251(c) does not impose any bona fide 
request requirement. In contrast, section 251(f)(1) provides that a 
rural telephone company is exempt from the requirements of 251(c) 
until, among other things, it receives a ``bona fide request'' for 
interconnection, services, or network elements. This suggests that, if 
Congress had intended to impose a ``bona fide request'' requirement on 
requesting carriers as part of their duty to negotiate in good faith, 
Congress would have made that requirement explicit.

D. Applicability of Section 252 to Preexisting Agreements

1. Background
    122. Section 252(a)(1) provides that, ``[u]pon receiving a request 
for interconnection, services, or network elements pursuant to section 
251, an incumbent local exchange carrier may negotiate and enter into a 
binding agreement with the requesting telecommunications carrier or 
carriers without regard to the standards set forth in subsections (b) 
and (c) of section 251. * * * The agreement, including any 
interconnection agreement negotiated before the date of enactment of 
the Telecommunications Act of 1996, shall be submitted to the State 
commission under subsection (e) of this section.''

[[Page 45498]]

    123. In the NPRM, we sought comment on whether sections 252(a)(1) 
and 252(e) require parties that have negotiated agreements for 
interconnection, services or network elements prior to the passage of 
the 1996 Act to submit such agreements to state commissions for 
approval. We also asked whether one party to such an existing agreement 
could compel renegotiation and arbitration in accordance with the 
procedures set forth in section 252.
2. Discussion
    124. We conclude that the 1996 Act requires all interconnection 
agreements, ``including any interconnection agreement negotiated before 
the date of enactment of the Telecommunications Act of 1996,'' to be 
submitted to the state commission for approval pursuant to section 
252(e). The 1996 Act does not exempt certain categories of agreements 
from this requirement. When Congress sought to exclude preexisting 
contracts from provisions of the new law, it did so expressly. For 
example, section 276(b)(3) provides that ``nothing in this section 
shall affect any existing contracts between location providers and 
payphone service providers or interLATA or intraLATA carriers that are 
in force and effect as of the date of enactment of the 
Telecommunications Act of 1996.'' Nothing in the legislative history 
leads us to a contrary conclusion. Congress intended, in enacting 
sections 251 and 252, to create opportunities for local telephone 
competition. We believe that this pro-competitive goal is best effected 
by subjecting all agreements to state commission review.
    125. The first sentence in section 252(a)(1) refers to requests for 
interconnection ``pursuant to section 251.'' The final sentence in 
section 252(a)(1) requires submission to the state commission of all 
negotiated agreements, including those negotiated before the enactment 
of the 1996 Act. Some parties have asserted that there is a tension 
between those two sentences. We conclude that the final sentence of 
section 252(a)(1), which requires that any interconnection agreement 
must be submitted to the state commission, can and should be read to be 
independent of the prior sentences in section 252(a)(1). The 
interpretation suggested by some commenters that preexisting contracts 
need only be filed if they are amended subsequent to the 1996 Act, or 
incorporated by reference into agreements negotiated pursuant to the 
1996 Act, would force us to impose conditions that were not intended by 
Congress.
    126. As a matter of policy, moreover, we believe that requiring 
filing of all interconnection agreements best promotes Congress' stated 
goals of opening up local markets to competition, and permitting 
interconnection on just, reasonable, and nondiscriminatory terms. State 
commissions should have the opportunity to review all agreements, 
including those that were negotiated before the new law was enacted, to 
ensure that such agreements do not discriminate against third parties, 
and are not contrary to the public interest. In particular, preexisting 
agreements may include provisions that violate or are inconsistent with 
the pro-competitive goals of the 1996 Act, and states may elect to 
reject such agreements under section 252(e)(2)(A). Requiring all 
contracts to be filed also limits an incumbent LEC's ability to 
discriminate among carriers, for at least two reasons. First, requiring 
public filing of agreements enables carriers to have information about 
rates, terms, and conditions that an incumbent LEC makes available to 
others. Second, any interconnection, service or network element 
provided under an agreement approved by the state commission under 
section 252 must be made available to any other requesting 
telecommunications carrier upon the same terms and conditions, in 
accordance with section 252(i). In addition, we believe that having the 
opportunity to review existing agreements may provide state commissions 
and potential competitors with a starting point for determining what is 
``technically feasible'' for interconnection.
    127. Conversely, excluding certain agreements from public 
disclosure could have anticompetitive consequences. For example, such 
contracts could include agreements not to compete. In addition, if we 
exempt agreements between neighboring non-competing LECs, those parties 
might have a disincentive to compete with each other in the future, in 
order to preserve the terms of their preexisting agreements. Such a 
result runs counter to the goal of the 1996 Act to encourage local 
service competition. Moreover, preserving such ``non-competing'' 
agreements could effectively insulate those parties from competition by 
new entrants. For example, if a new entrant seeking to provide 
competitive local service in a rural community is unable to obtain from 
a neighboring BOC interconnection or transport and termination on terms 
that are as favorable as those the BOC offers to the incumbent LEC in 
the rural area, the new entrant cannot effectively compete. This 
analysis does not address the separate question of whether an incumbent 
LEC in a rural area must offer interconnection, resale services, or 
unbundled network elements. As discussed infra, Section XII, Congress 
provided rural carriers with an exemption from section 251(c) 
requirements until the state commission removes such exemption. 47 
U.S.C. Sec. 251(f)(1). This is because the new entrant will have to 
charge its subscribers higher rates than the incumbent LEC charges to 
place calls to subscribers of the neighboring BOC.
    128. We find that section 259 does not compel us to reach a 
different conclusion regarding the application of section 252 to 
agreements between neighboring LECs. Section 259 requires the 
Commission to prescribe, within one year after the date of enactment of 
the 1996 Act, regulations that require incumbent LECs ``to make 
available to any qualifying carrier such public switched network 
infrastructure, technology, information, and telecommunications 
facilities and functions as may be requested by such qualifying carrier 
to provide telecommunications services, or to provide access to 
information services * * *'' 47 U.S.C. Sec. 259(a). A ``qualifying 
carrier'' is a telecommunications carrier that ``lacks economies of 
scale or scope,'' and that offers telephone exchange service, exchange 
access, and any other service included in universal service to all 
consumers in the service area without preference. 47 U.S.C. 
Sec. 259(d). Section 259 is limited to agreements for infrastructure 
sharing between incumbent LECs and telecommunications carriers that 
lack ``economies of scale or scope,'' as determined in accordance with 
regulations prescribed by the Commission. We conclude that the purpose 
and scope of section 259 differ significantly from the purpose and 
scope of section 251. The Commission plans to initiate a proceeding to 
establish regulations pursuant to section 259. Section 259 is a limited 
and discrete provision designed to bring the benefits of advanced 
infrastructure to additional subscribers, in the context of the pro-
competitive goals and provisions of the 1996 Act. Moreover, section 
259(b)(7) requires LECs to file with the Commission or the state ``any 
tariffs, contracts or other arrangements showing the rates, terms, and 
conditions under which such carrier is making available public switched 
network infrastructure and functions under this

[[Page 45499]]

section.'' We believe that this language further supports our 
conclusion that Congress intended agreements between neighboring LECs 
to be filed and available for public inspection. Commenters also have 
failed to persuade us that universal service is jeopardized by our 
finding that agreements between neighboring LECs are subject to section 
252 filing and review provisions. Concerns regarding universal service 
should be addressed by the Federal-State Joint Board, empaneled 
pursuant to section 254 of the 1996 Act. The Joint Board has initiated 
a comprehensive review of universal service issues and is considering, 
among other matters, access to telecommunications and information 
services in rural and high cost areas. In addition, as discussed in 
Section XII, infra, the 1996 Act provides for exemptions, suspension, 
or modification of some of the requirements in section 251 for rural or 
smaller carriers.
    129. Some parties have suggested that we provide parties an 
opportunity to renegotiate preexisting contracts. Parties, of course, 
may mutually agree to renegotiate agreements, but we decline to mandate 
that parties renegotiate existing contracts. In addition, as discussed 
below, commercial mobile radio service (CMRS) providers that are party 
to preexisting agreements with incumbent LECs that provide for non-
mutual compensation have the option of renegotiating such agreements 
with no termination liabilities or contract penalties. We believe that 
generally requiring renegotiation of preexisting contracts is 
unnecessary, however, because state commissions will review preexisting 
agreements, and may reject any negotiated agreement that 
``discriminates against a telecommunications carrier not a party to the 
agreement,'' or that ``is not consistent with the public interest, 
convenience, and necessity.'' We recognize that preexisting agreements 
were negotiated under very different circumstances, and may not provide 
a reasonable basis for interconnection agreements under the 1996 Act. 
For example, non-competing neighboring LECs may have negotiated terms 
that simply are not viable in a competitive market. It would not foster 
efficient long-term competition to force parties to make available to 
all requesting carriers interconnection on terms not sustainable in a 
competitive environment. In such circumstances, a state commission 
would have authority to reject a preexisting agreement as inconsistent 
with the public interest. If a state commission approves a preexisting 
agreement, that agreement will be available to other parties in 
accordance with section 252(i). Contrary to NYNEX's assertion, once a 
state approves an agreement under section 252(e), that agreement is 
``approved under'' section 252.
    130. We decline to require immediate filing of preexisting 
agreements. States should establish procedures and reasonable time 
frames for requiring filing of preexisting agreements in a timely 
manner. We leave these procedures largely in the hands of the states in 
order to ensure that we do not impair some states' ability to carry out 
their other duties under the 1996 Act, especially if a large number of 
such agreements must be filed and approved by the state commission. We 
believe, nevertheless, that we should set an outer time period to file 
with the appropriate state commission agreements that Class A carriers 
have with other Class A carriers that predate the 1996 Act. Class A 
companies are defined as companies ``having annual revenues from 
regulated telecommunications operations of $100,000,000 or more.'' 47 
CFR Sec. 32.11(a)(1). We conclude that setting such a time limit will 
ensure that third parties are not prevented indefinitely from reviewing 
and taking advantage of the terms of preexisting agreements. We are 
concerned, however, about the burden that a national filing deadline 
might impose on small telephone companies that have preexisting 
agreements with Class A carriers or with other small carriers. We 
therefore limit the filing deadline requirement to preexisting 
agreements between Class A carriers. We encourage all carriers to file 
preexisting contracts with the appropriate state commission no later 
than June 30, 1997, but impose this as a requirement only with respect 
to agreements between Class A carriers. We find that requiring 
preexisting agreements between Class A carriers to be filed no later 
than June 30, 1997 is unlikely to burden state commissions unduly, and 
will give parties a reasonable opportunity to renegotiate agreements if 
they so choose, while at the same time, establishing this outer time 
limit ensures that third parties will have access to the terms of such 
agreements, under section 252(i), within a reasonable period. We expect 
to have completed proceedings on universal service and access charges 
by this filing deadline. States may impose a shorter time period for 
filing preexisting agreements.

IV. Interconnection

    131. This section of the Report and Order, and the three sections 
that follow it, address the interconnection and unbundling obligations 
that the Act imposes on incumbent LECs. Beyond the resale of incumbent 
LEC services, it is these obligations that pave the way for the 
introduction of facilities-based competition with incumbent LECs. The 
interconnection obligation of section 251(c)(2), discussed in this 
section, allows competing carriers to choose the most efficient points 
at which to exchange traffic with incumbent LECs, thereby lowering the 
competing carriers' costs of, among other things, transport and 
termination of traffic. The unbundling obligation of section 251(c)(3) 
further permits new entrants, where economically efficient, to 
substitute incumbent LEC facilities for some or all of the facilities 
the new entrant would have had to obtain in order to compete. Finally, 
both the interconnection and unbundling sections of the Act, in 
combination with the collocation obligation imposed on incumbents by 
section 251(c)(6), allow competing carriers to choose technically 
feasible methods of achieving interconnection or access to unbundled 
elements.
    132. Section 251(c)(2) imposes upon incumbent LECs ``the duty to 
provide, for the facilities and equipment of any requesting 
telecommunications carrier, interconnection with the local exchange 
carrier's network * * * for the transmission and routing of telephone 
exchange service and exchange access.'' Such interconnection must be: 
(1) provided by the incumbent LEC at ``any technically feasible point 
within [its] network;'' (2) ``at least equal in quality to that 
provided by the local exchange carrier to itself or * * * [to] any 
other party to which the carrier provides interconnection;'' and (3) 
provided on rates, terms, and conditions that are ``just, reasonable, 
and nondiscriminatory, in accordance with the terms and conditions of 
the agreement and the requirements of this section and section 252.''

A. Relationship Between Interconnection and Transport and Termination

1. Background
    133. In the NPRM, we sought comment on the relationship between the 
obligation of incumbent LECs to provide ``interconnection'' under 
section 251(c)(2) and the obligation of all LECs to establish 
reciprocal compensation arrangements for the ``transport and 
termination'' of

[[Page 45500]]

telecommunications pursuant to section 251(b)(5). We stated that the 
term ``interconnection'' might refer only to the physical linking of 
two networks or to both the linking of facilities and the transport and 
termination of traffic. We noted in the NPRM that section 252(d) sets 
forth different pricing standards for interconnection and transport and 
termination.
2. Discussion
    134. We conclude that the term ``interconnection'' under section 
251(c)(2) refers only to the physical linking of two networks for the 
mutual exchange of traffic. Including the transport and termination of 
traffic within the meaning of section 251(c)(2) would result in reading 
out of the statute the duty of all LECs to establish ``reciprocal 
compensation arrangements for the transport and termination of 
telecommunications,'' under section 251(b)(5). In addition, in setting 
the pricing standard for section 251(c)(2) interconnection, section 
252(d)(1) states it applies when state commissions make determinations 
``of the just and reasonable rate for interconnection of facilities and 
equipment for purposes of subsection (c)(2) of section 251.'' Because 
section 251(d)(1) states that it only applies to the interconnection of 
``facilities and equipment,'' if we were to interpret section 251(c)(2) 
to refer to transport and termination of traffic as well as the 
physical linking of equipment and facilities, it would still be 
necessary to find a pricing standard for the transport and termination 
of traffic apart from section 252(d)(1). We also reject CompTel's 
argument that reading section 251(c)(2) to refer only to the physical 
linking of networks implies that incumbent LECs would not have a duty 
to route and terminate traffic. That duty applies to all LECs and is 
clearly expressed in section 251(b)(5). We note that because 
interconnection refers to the physical linking of two networks, and not 
the transport and termination of traffic, access charges are not 
affected by our rules implementing section 251(c)(2).

B. National Interconnection Rules

1. Background
    135. In the NPRM, we tentatively concluded that national 
interconnection rules would facilitate swift entry by competitors in 
multiple states by eliminating the need to comply with a multiplicity 
of state variations in technical and procedural requirements. NPRM at 
para. 40, 61 FR 18311 (April 25, 1996). We sought comment on this 
tentative conclusion.
2. Discussion
    136. As discussed more fully above, we conclude that national rules 
regarding interconnection pursuant to section 251(c)(2) are necessary 
to further Congress's goal of creating conditions that will facilitate 
the development of competition in the telephone exchange market. 
Uniform rules will permit all carriers, including small entities and 
small incumbent LECs, to plan regional or national networks using the 
same interconnection points in similar networks nationwide. Uniform 
rules will also guarantee consistent, minimum nondiscrimination 
safeguards and ``equal in quality'' standards in every state. Such 
rules will also avoid relitigating, in multiple states, the issue of 
whether interconnection at a particular point is technically feasible.
    137. We believe, however, that inflexible or overly detailed 
national rules implementing section 251(c)(2) may inhibit the ability 
of the states or the parties to reach arrangements that reflect 
technological and market advances and regional differences. We also 
believe that, on several issues, the record is not adequate at this 
time to justify the establishment of national rules. Therefore, as 
required by section 251(d)(3) and as discussed in section II.C. above, 
our rules will permit states to go beyond the national rules discussed 
below, and impose additional procompetitive interconnection 
requirements, as long as such requirements are otherwise consistent 
with the 1996 Act and the Commission's regulations. We believe that we 
can benefit from state experience in our ongoing review of these 
issues.

C. Interconnection for the Transmission and Routing of Telephone 
Exchange Service and Exchange Access

1. Background
    138. Section 251(c)(2) imposes a duty upon incumbent LECs to 
provide ``interconnection with the [LEC's] network * * * for the 
transmission and routing of telephone exchange service and exchange 
access.'' In the NPRM, we sought comment on whether a carrier could 
request interconnection pursuant to subsection (c)(2) for purposes of 
transmitting and routing telephone exchange service, exchange access, 
or both, or whether this provision requires that such a request be 
solely for purposes of providing both telephone exchange service and 
exchange access.
2. Discussion
    139. We conclude that the phrase ``telephone exchange service and 
exchange access'' imposes at least three obligations on incumbent LECs: 
an incumbent must provide interconnection for purposes of transmitting 
and routing telephone exchange traffic or exchange access traffic or 
both. We believe that this interpretation is consistent with both the 
language of the statute and Congress's intent to foster entry by 
competitive providers into the local exchange market. As the U.S. Court 
of Appeals for the Fifth Circuit stated in Peacock v. Lubbock Compress 
Company, ``the word `and' is not a word with a single meaning, for 
chameleonlike, it takes its color from its surroundings.'' The court 
held that ``[i]n the construction of statutes, it is the duty of the 
Court to ascertain the clear intention of the legislature. In order to 
do this, Courts are often compelled to construe `or' as meaning `and,' 
and again `and' as meaning `or'.'' Peacock v. Lubbock Compress Company, 
252 F.2d 892, 893 (5th Cir. 1958) (citing United States v. Fisk, 70 
U.S. 445, 448). Moreover, the term ``local exchange carrier'' is 
defined in the Act as ``any person that is engaged in the provision of 
telephone exchange service or exchange access.'' Thus, we believe that 
Congress intended to facilitate entry by carriers offering either 
service. In imposing an interconnection requirement under section 
251(c)(2) to facilitate such entry, however, we believe that Congress 
did not want to deter entry by entities that seek to offer either 
service, or both, and, as a result, section 251(c)(2) requires 
incumbent LECs to interconnect with carriers providing ``telephone 
exchange service and exchange access.'' Congress made clear that 
incumbent LECs must provide interconnection to carriers that seek to 
offer telephone exchange service and to carriers that seek to offer 
exchange access. This interpretation is consistent with section 
251(c)(2), which imposes an obligation on incumbent LECs, but not 
requesting carriers. Thus, for example, an analogous requirement might 
be that incumbent LECs must provide interconnection for the 
transmission and routing of ``electrical and optical signals.'' Such a 
hypothetical requirement could not rationally be read to obligate 
requesting carriers to provide both electrical and optical signals.
    140. We also conclude that requiring new entrants to make available 
both local exchange service and exchange access as a prerequisite to 
obtaining interconnection to the incumbent LEC's network under 
subsection (c)(2) would unduly restrict potential competitors. For 
example, CAPs often enter the

[[Page 45501]]

telecommunications market as exchange access providers prior to 
offering telephone exchange services. Further, applying separate 
regulatory regimes (i.e., section 251 related-rules for providers of 
telephone exchange and exchange access services and section 201 
related-rules for providers of only exchange access services) with 
divergent requirements to parties using essentially the same equipment 
to transmit and route traffic, is undesirable in light of the new 
procompetitive paradigm created by section 251. We see no convincing 
justification for treating providers of exchange access services that 
offer telephone exchange services differently from access providers who 
do not offer telephone exchange services. We therefore conclude that 
parties offering only exchange access are permitted to seek 
interconnection pursuant to section 251(c)(2).

D. Interexchange Service is Not Telephone Exchange Service or Exchange 
Access

1. Background
    141. Sections 251(c)(2) and 251(c)(3) impose duties upon incumbent 
LECs to provide interconnection and nondiscriminatory access to 
unbundled network elements to ``any requesting telecommunications 
carrier.'' In the NPRM, we tentatively concluded that carriers 
providing interexchange services are ``telecommunications carriers'' 
and thus may seek interconnection and unbundled elements under 
subsections (c)(2) and (c)(3). We also tentatively concluded, however, 
that with respect to section 251(c)(2), the statute imposes limits on 
the purposes for which any telecommunications carrier, including IXCs, 
may request interconnection pursuant to that section. Section 251(c)(2) 
imposes an obligation upon incumbent LECs to provide requesting 
carriers with interconnection if the purpose of the interconnection is 
for the ``transmission and routing of telephone exchange service and 
exchange access.'' We tentatively concluded in the NPRM that 
interexchange service does not appear to constitute either ``telephone 
exchange service'' or ``exchange access.'' ``Exchange access'' is 
defined in section 3(16) as ``the offering of access to telephone 
exchange services or facilities for the purpose of the origination or 
termination of telephone toll services.'' We stated that an IXC that 
requests interconnection to originate or terminate an interexchange 
toll call is not ``offering'' access services, but rather is 
``receiving'' access services.
2. Discussion
    142. We conclude that IXCs are telecommunications carriers under 
the 1996 Act, because they provide telecommunications services (i.e., 
``offer telecommunications for a fee directly to the public'') by 
originating or terminating interexchange traffic. IXCs are permitted 
under the statute to obtain interconnection pursuant to section 
251(c)(2) for the ``transmission and routing of telephone exchange 
service and exchange access.'' Moreover, traditional IXCs are a 
significant potential new local competitor and we conclude that denying 
them the right to obtain section 251(c)(2) interconnection lacks any 
legal or policy justification. Thus, all carriers (including those 
traditionally classified as IXCs) may obtain interconnection pursuant 
to section 251(c)(2) for the purpose of terminating calls originating 
from their customers residing in the same telephone exchange (i.e., 
non-interexchange calls).
    143. We conclude, however, that an IXC that requests 
interconnection solely for the purpose of originating or terminating 
its interexchange traffic, not for the provision of telephone exchange 
service and exchange access to others, on an incumbent LEC's network is 
not entitled to receive interconnection pursuant to section 251(c)(2). 
Section 251(c)(2) states that incumbent LECs have a duty to 
interconnect with telecommunications providers ``for the transmission 
and routing of telephone exchange service and exchange access.'' A 
telecommunications carrier seeking interconnection only for 
interexchange services is not within the scope of this statutory 
language because it is not seeking interconnection for the purpose of 
providing telephone exchange service. Nor does a carrier seeking 
interconnection of interstate traffic only--for the purpose of 
providing interstate services only--fall within the scope of the phrase 
``exchange access.'' Such a would-be interconnector is not ``offering'' 
access to telephone exchange services. As we stated in the NPRM, an IXC 
that seeks to interconnect solely for the purpose of originating or 
terminating its own interexchange traffic is not offering access, but 
rather is only obtaining access for its own traffic. Thus, we disagree 
with CompTel's position that IXCs are offering exchange access when 
they offer and provide exchange access as a part of long distance 
service. We conclude that a carrier may not obtain interconnection 
pursuant to section 251(c)(2) for the purpose of terminating 
interexchange traffic, even if that traffic was originated by a local 
exchange customer in a different telephone exchange of the same carrier 
providing the interexchange service, if it does not offer exchange 
access services to others. As we stated above, however, providers of 
competitive access services are eligible to receive interconnection 
pursuant to section 251(c)(2). Thus, traditional IXCs that offer access 
services in competition with an incumbent LEC (i.e., IXCs that offer 
access services to other carriers as well as to themselves) are also 
eligible to obtain interconnection pursuant to section 251(c)(2). For 
example, when an IXC interconnects at a local switch, bypassing the 
incumbent LECs' transport network, that IXC may offer access to the 
local switch in competition with the incumbent. In such a situation, 
the interconnection point may be considered a section 251(c)(2) 
interconnection point.

E. Definition of ``Technically Feasible''

1. Background
    144. In addition to specifying the purposes for which carriers may 
request interconnection, section 251(c)(2) obligates incumbent LECs to 
provide interconnection within their networks at any ``technically 
feasible point.'' Similarly, section 251(c)(3) obligates incumbent LECs 
to provide access to unbundled elements at any ``technically feasible 
point.'' Thus our interpretation of the term ``technically feasible'' 
applies to both sections.
    145. In the NPRM, we sought comment on a ``dynamic'' definition of 
``technically feasible'' that would provide flexibility for negotiating 
parties and the states in determining interconnection and unbundling 
points as network technology evolves. We requested comment on the 
extent to which network reliability concerns should be included in a 
technical feasibility analysis, and tentatively concluded that, if such 
concerns were involved, the incumbent LEC had the burden to support 
such a claim with detailed information. We also sought comment on the 
role of other considerations, such as economic burden, in determining 
technical feasibility under sections 251(c)(2) and 251(c)(3).
    146. We also tentatively concluded that interconnection or access 
at a particular point in one LEC network evidences the technical 
feasibility of providing the same or similar interconnection or access 
in another, similarly structured LEC network. Finally, we tentatively 
concluded that incumbent LECs have the burden of

[[Page 45502]]

proving the technical infeasibility of providing interconnection or 
access at a particular point.
2. Discussion
    147. We conclude that the term ``technically feasible'' refers 
solely to technical or operational concerns, rather than economic, 
space, or site considerations. We further conclude that the obligations 
imposed by sections 251(c)(2) and 251(c)(3) include modifications to 
incumbent LEC facilities to the extent necessary to accommodate 
interconnection or access to network elements. Specific, significant, 
and demonstrable network reliability concerns associated with providing 
interconnection or access at a particular point, however, will be 
regarded as relevant evidence that interconnection or access at that 
point is technically infeasible. We also conclude that preexisting 
interconnection or access at a particular point evidences the technical 
feasibility of interconnection or access at substantially similar 
points. Finally, we conclude that incumbent LECs must prove to the 
appropriate state commission that a particular interconnection or 
access point is not technically feasible.
    148. We find that the 1996 Act bars consideration of costs in 
determining ``technically feasible'' points of interconnection or 
access. In the 1996 Act, Congress distinguished ``technical'' 
considerations from economic concerns. Section 251(f), for example, 
exempts certain rural LECs from ``unduly economically burdensome'' 
obligations imposed by section 251(c) even where satisfaction of such 
obligations is ``technically feasible.'' Similarly, section 
254(h)(2)(A) treats ``technically feasible'' and ``economically 
reasonable'' as separate requirements. Finally, we note that the House 
committee that considered H.R. 1555 (which was combined with Senate 
Bill S.652 to form the 1996 Act) dropped the term ``economically 
reasonable'' from its unbundling provision. The House committee 
explicitly addressed this substantive change, reporting that ``this 
requirement could result in certain unbundled * * * elements * * * not 
being made available.'' H. Rep. 104-204, 71 (1995). Thus, the 
deliberate and explained substantive omission of explicit economic 
requirements in sections 251(c)(2) and 251(c)(3) cannot be undone 
through an interpretation that such considerations are implicit in the 
term ``technically feasible.'' Of course, a requesting carrier that 
wishes a ``technically feasible'' but expensive interconnection would, 
pursuant to section 252(d)(1), be required to bear the cost of that 
interconnection, including a reasonable profit.
    149. USTA and SBC cite the Commission's 900 Service order (Policies 
and Rules Concerning Interstate 900 Telecommunications Services, Report 
and Order, 56 FR 56160 (November 1, 1991)) as support for the 
contention that costs must be considered in a technical feasibility 
analysis. In that order, the Commission concluded that ``[i]n defining 
`technically feasible,' we balance both technical and economic 
considerations with a view toward providing [900] blocking capability 
to consumers without imposing undue economic burdens on LECs.'' Our 900 
Service order, however, has little bearing on our interpretation of the 
term ``technically feasible'' in the 1996 Act. As stated above, the 
1996 Act distinguishes technical considerations from the ``undue 
economic burdens'' considered in the 900 Service order. Indeed, 
Congress used virtually the same language--``unduly economically 
burdensome''--in drawing the distinction. If, as SBC contends, we are 
to presume that Congress was aware of the Commission's analysis of the 
technical feasibility of 900 call blocking, the 1996 Act appears 
squarely to reject that view of technical feasibility. Moreover, unlike 
the costs of providing 900 call blocking, which we imposed largely on 
LECs in the 900 Service order, as noted above, to the extent incumbent 
LECs incur costs to provide interconnection or access under sections 
251(c)(2) or 251(c)(3), incumbent LECs may recover such costs from 
requesting carriers.
    150. In addition to economic considerations, section 251(c)(6) 
distinguishes considerations of ``space limitations'' from those of 
``technical reasons,'' and thus, in general, we believe existing space 
or site restrictions should not be included within a technical 
feasibility analysis. Of course, under section 251(c)(6) ``space'' 
restrictions are expressly considered along with ``technical'' 
considerations in determining whether an incumbent LEC must provide for 
physical collocation. Where physical collocation is not practical 
because of ``space limitations,'' however, incumbent LECs must provide 
for virtual collocation. Section 251 is silent as to whether an 
incumbent LEC's duty to provide for virtual collocation or other 
methods of interconnection or access to unbundled elements is dependent 
on space constraints. We conclude, as a practical matter, that space 
limitations at a particular network site, without any possibility of 
expansion, may render interconnection or access at that point 
infeasible, technically or otherwise. Where such expansion is possible, 
however, we conclude that, in light of the distinction drawn in section 
251(c)(6), site restrictions do not represent a ``technical'' obstacle. 
Again, however, the requesting party would bear the cost of any 
necessary expansion. Nor do we believe the term ``technical,'' when 
interpreted in accordance with its ordinary meaning as referring to 
engineering and operational concerns in the context of sections 
251(c)(2) and 251(c)(3), includes consideration of accounting or 
billing restrictions.
    151. Several parties also attempt to draw a distinction between 
what is ``feasible'' under the terms of the statute, and what is 
``possible.'' The words ``feasible'' and ``possible,'' however, are 
used synonymously. Feasible is defined as ``capable of being 
accomplished or brought about; possible.'' The statute itself provides 
a more meaningful distinction. Unlike the ``technically feasible'' 
terminology included in sections 251(c)(2) and 251(c)(3), section 
251(c)(6) uses the term ``practical for technical reasons'' in 
determining the scope of an incumbent LEC's obligation to provide for 
physical collocation. ``Practical'' is defined as ``manifested in 
practice or action * * * not theoretical or ideal'' or ``adapted or 
designed for actual use; useful,'' and connotes similarity to ordinary 
usage. Thus, it is reasonable to interpret Congress' use of the term 
``feasible'' in sections 251(c)(2) and 251(c)(3) as encompassing more 
than what is merely ``practical'' or similar to what is ordinarily 
done. That is, use of the term ``feasible'' implies that 
interconnecting or providing access to a LEC network element may be 
feasible at a particular point even if such interconnection or access 
requires a novel use of, or some modification to, incumbent LEC 
equipment. This interpretation is consistent with the fact that 
incumbent LEC networks were not designed to accommodate third-party 
interconnection or use of network elements at all or even most points 
within the network. If incumbent LECs were not required, at least to 
some extent, to adapt their facilities to interconnection or use by 
other carriers, the purposes of sections 251(c)(2) and 251(c)(3) would 
often be frustrated. For example, Congress intended to obligate the 
incumbent to accommodate the new entrant's network architecture by 
requiring the incumbent to provide interconnection ``for the facilities 
and equipment'' of the new entrant.

[[Page 45503]]

Consistent with that intent, the incumbent must accept the novel use 
of, and modification to, its network facilities to accommodate the 
interconnector or to provide access to unbundled elements.
    152. We also conclude, however, that legitimate threats to network 
reliability and security must be considered in evaluating the technical 
feasibility of interconnection or access to incumbent LEC networks. 
Negative network reliability effects are necessarily contrary to a 
finding of technical feasibility. Each carrier must be able to retain 
responsibility for the management, control, and performance of its own 
network. Thus, with regard to network reliability and security, to 
justify a refusal to provide interconnection or access at a point 
requested by another carrier, incumbent LECs must prove to the state 
commission, with clear and convincing evidence, that specific and 
significant adverse impacts would result from the requested 
interconnection or access. The reports of the Commission's Network 
Reliability Council discuss network reliability considerations, and 
establish templates that list activities that need to occur when 
service providers connect their networks pursuant to defined 
interconnection specifications or when they are attempting to define a 
new network interface specification.
    153. We further conclude that successful interconnection or access 
to an unbundled element at a particular point in a network, using 
particular facilities, is substantial evidence that interconnection or 
access is technically feasible at that point, or at substantially 
similar points in networks employing substantially similar facilities. 
In comparing networks for this purpose, the substantial similarity of 
network facilities may be evidenced, for example, by their adherence to 
the same interface or protocol standards. We also conclude that 
previous successful interconnection at a particular point in a network 
at a particular level of quality constitutes substantial evidence that 
interconnection is technically feasible at that point, or at 
substantially similar points, at that level of quality. Although most 
parties agree with this conclusion, some LECs contend that such 
comparisons are all but impossible because of alleged variability in 
network technologies, even where the ultimate services offered by 
separate networks are the same. We believe that, if the facilities are 
substantially similar, the LECs' contention is adequately addressed.
    154. Finally, because sections 251(c)(2) and 251(c)(3) impose 
duties upon incumbent LECs, we conclude that incumbent LECs must prove 
to the appropriate state commission that interconnection or access at a 
point is not technically feasible. Incumbent LECs possess the 
information necessary to assess the technical feasibility of 
interconnecting to particular LEC facilities. Further, incumbent LECs 
have a duty to make available to requesting carriers general 
information indicating the location and technical characteristics of 
incumbent LEC network facilities. Without access to such information, 
competing carriers would be unable to make rational network deployment 
decisions and could be forced to make inefficient use of their own and 
incumbent LEC facilities, with anticompetitive effects.
    155. We have considered the economic impact of our rules in this 
section on small incumbent LECs. For example, the Rural Telephone 
Coalition argues that the Commission should set interconnection points 
in a flexible manner to recognize the differences between carriers and 
regions. We do not adopt the Rural Telephone Coalition's position 
because we believe that, in general, the Act does not permit incumbent 
LECs to deny interconnection or access to unbundled elements for any 
reason other than a showing that it is not technically feasible. We 
believe that this interpretation will advance the procompetitive goals 
of the statute. We also note, however, that section 251(f) of the 1996 
Act provides relief to certain small LECs from our regulations 
implementing section 251.

F. Technically Feasible Points of Interconnection

1. Background
    156. In the NPRM, we requested comment on which points within an 
incumbent LEC's network constitute ``technically feasible'' points for 
purposes of section 251(c)(2). Having defined the phrase ``technically 
feasible'' above, we now determine a minimum set of technically 
feasible points of interconnection.
2. Discussion
    157. We conclude that we should identify a minimum list of 
technically feasible points of interconnection that are critical to 
facilitating entry by competing local service providers. Section 
251(c)(2) gives competing carriers the right to deliver traffic 
terminating on an incumbent LEC's network at any technically feasible 
point on that network, rather than obligating such carriers to 
transport traffic to less convenient or efficient interconnection 
points. Section 251(c)(2) lowers barriers to competitive entry for 
carriers that have not deployed ubiquitous networks by permitting them 
to select the points in an incumbent LEC's network at which they wish 
to deliver traffic. Moreover, because competing carriers must usually 
compensate incumbent LECs for the additional costs incurred by 
providing interconnection, competitors have an incentive to make 
economically efficient decisions about where to interconnect.
    158. We conclude that, at a minimum, incumbent LECs must provide 
interconnection at the line-side of a local switch (at, for example, 
the main distribution frame), the trunk-side of a local switch; the 
trunk interconnection points for a tandem switch; and central office 
cross-connect points in general. This requirement includes 
interconnection at those out-of-band signaling transfer points 
necessary to exchange traffic and access call related databases. All of 
these points of interconnection are used today by competing carriers, 
noncompeting carriers, or LECs themselves for the exchange of traffic, 
and thus we conclude that interconnection at such points is technically 
feasible.
    159. A varied group of commenters, including Bell Atlantic and 
AT&T, agree that interconnection at the line-side of the switch is 
technically feasible. Interconnection at this point is currently 
provided to some commercial mobile radio service (CMRS) carriers and 
may be necessary for other competitors that have their own distribution 
plant, but seek to interconnect to the incumbent's switch. We also 
agree with numerous commenters that claim that interconnection at the 
trunk-side of a switch is technically feasible and should be available 
upon request. Interconnection at this point is currently used by 
competing carriers to exchange traffic with incumbent LECs. 
Interconnection to tandem switching facilities is also currently used 
by IXCs and competing access providers, and is thus technically 
feasible. Finally, central office cross-connect points, which are 
designed to facilitate interconnection, are natural points of 
technically feasible interconnection to, for example, interoffice 
transmission facilities. There may be rare circumstances where there 
are true technical barriers to interconnection at the line- or trunk-
side of the switch or at central office cross-connect points, however, 
the parties have not presented us with any such circumstances. Thus,

[[Page 45504]]

incumbent LECs must prove to the state commissions that such points are 
not technically feasible interconnection points.
    160. We also note that the points of access to unbundled elements 
discussed below may also serve as points of interconnection (i.e., 
points in the network that may serve as places where potential 
competitors may wish to exchange traffic with the incumbent LEC other 
than for purposes of gaining access to unbundled elements), and thus we 
incorporate those points by reference here. Finally, as noted above, we 
have identified a minimum list of technically feasible interconnection 
points: (1) The line-side of a local switch; (2) the trunk-side of a 
local switch; (3) the trunk interconnection points for a tandem switch; 
(4) central office cross-connect points; (5) out-of-band signaling 
transfer points; and (6) the points of access to unbundled elements. In 
addition, we anticipate and encourage parties and the states, through 
negotiation and arbitration, to identify additional points of 
technically feasible interconnection. We believe that the experience of 
the parties and the states will benefit our ongoing review of 
interconnection.

G. Just, Reasonable, and Nondiscriminatory Rates, Terms, and Conditions 
of Interconnection

1. Background
    161. Section 251(c)(2)(D) requires that incumbent LECs provide 
interconnection ``on rates, terms, and conditions that are just, 
reasonable, and nondiscriminatory.'' In the NPRM, we sought comment on 
whether we should adopt national requirements governing the terms and 
conditions of providing interconnection. We also sought comment on how 
we should determine whether the terms and conditions for 
interconnection arrangements are just, reasonable, and 
nondiscriminatory, and how we should enforce such rules. In particular, 
we sought comment on whether we should adopt national guidelines 
governing installation, service, maintenance, and repair of the 
incumbent LEC's portion of interconnection facilities.
2. Discussion
    162. We conclude that minimum national standards for just, 
reasonable, and nondiscriminatory terms and conditions of 
interconnection will be in the public interest and will provide 
guidance to the parties and the states in the arbitration process and 
thereafter. We believe that national standards will tend to offset the 
imbalance in bargaining power between incumbent LECs and competitors 
and encourage fair agreements in the marketplace between parties by 
setting minimum requirements that new entrants are guaranteed in 
arbitrations. Negotiations between an incumbent and a new entrant 
differ from commercial negotiations in a competitive market because new 
entrants are dependent solely on the incumbent for interconnection.
    163. Section 202(a) of the Act states that ``[i]t shall be unlawful 
for any common carrier to make any unjust or unreasonable 
discrimination in charges, practices, * * * facilities, or services for 
or in connection with like communication service * * * by any means or 
device, or to make or give any undue or unreasonable preference or 
advantage to any particular person.'' By comparison, section 251(c)(2) 
creates a duty for incumbent LECs ``to provide * * * any requesting 
telecommunications carrier, interconnection with a LEC's network on 
rates, terms, and conditions that are just, reasonable, and 
nondiscriminatory.'' The nondiscrimination requirement in section 
251(c)(2) is not qualified by the ``unjust or unreasonable'' language 
of section 202(a). We therefore conclude that Congress did not intend 
that the term ``nondiscriminatory'' in the 1996 Act be synonymous with 
``unjust and unreasonable discrimination'' used in the 1934 Act, but 
rather, intended a more stringent standard.
    164. Given that the incumbent LEC will be providing interconnection 
to its competitors pursuant to the purpose of the 1996 Act, the LEC has 
the incentive to discriminate against its competitors by providing them 
less favorable terms and conditions of interconnection than it provides 
itself. Permitting such circumstances is inconsistent with the 
procompetitive purpose of the Act. Therefore, we reject for purposes of 
section 251, our historical interpretation of ``nondiscriminatory,'' 
which we interpreted to mean a comparison between what the incumbent 
LEC provided other parties in a regulated monopoly environment. We 
believe that the term ``nondiscriminatory,'' as used throughout section 
251, applies to the terms and conditions an incumbent LEC imposes on 
third parties as well as on itself. In any event, by providing 
interconnection to a competitor in a manner less efficient than an 
incumbent LEC provides itself, the incumbent LEC violates the duty to 
be ``just'' and ``reasonable'' under section 251(c)(2)(D). Also, 
incumbent LECs may not discriminate against parties based upon the 
identity of the carrier (i.e., whether the carrier is a CMRS provider, 
a CAP, or a competitive LEC). As long as a carrier meets the statutory 
requirements, as discussed in this section, it has a right to obtain 
interconnection with the incumbent LEC pursuant to section 251(c)(2).
    165. We identify below specific terms and conditions for 
interconnection in discussing physical or virtual collocation (i.e., 
two methods of interconnection). We conclude here, however, that where 
a carrier requesting interconnection pursuant to section 251(c)(2) does 
not carry a sufficient amount of traffic to justify separate one-way 
trunks, an incumbent LEC must accommodate two-way trunking upon request 
where technically feasible. Refusing to provide two-way trunking would 
raise costs for new entrants and create a barrier to entry. Thus, we 
conclude that if two-way trunking is technically feasible, it would not 
be just, reasonable, and nondiscriminatory for the incumbent LEC to 
refuse to provide it.
    166. Finally, as discussed below, we reject Bell Atlantic's 
suggestion that we impose reciprocal terms and conditions on incumbent 
LECs and requesting carriers pursuant to section 251(c)(2). Section 
251(c)(2) does not impose on non-incumbent LECs the duty to provide 
interconnection. The obligations of LECs that are not incumbent LECs 
are generally governed by sections 251 (a) and (b), not section 251(c). 
Also, the statute itself imposes different obligations on incumbent 
LECs and other LECs (i.e., section 251(b) imposes obligations on all 
LECs while section 251(c) obligations are imposed only on incumbent 
LECs). We do note, however, that 251(c)(1) imposes upon a requesting 
telecommunications carrier a duty to negotiate the terms and conditions 
of interconnection agreements in good faith. We also conclude that 
MCI's POI proposal, permitting interconnecting carriers, both 
competitors and incumbent LECs, to designate points of interconnection 
on each other's networks, is at this time best addressed in 
negotiations and arbitrations between parties. We believe that the 
record on this issue is not sufficiently persuasive to justify 
Commission action at this time. As market conditions evolve, we will 
continue to review and revise our rules as necessary.

H. Interconnection that is Equal in Quality

1. Background
    167. Section 251(c)(2)(C) requires that the interconnection 
provided by an

[[Page 45505]]

incumbent LEC be ``at least equal in quality to that provided by the 
[incumbent LEC] to itself or to any subsidiary, affiliate, or any other 
party to which the carrier provides interconnection.'' In the NPRM, we 
sought comment on how to determine whether interconnection is ``equal 
in quality.''
2. Discussion
    168. We conclude that the equal in quality standard of section 
251(c)(2)(C) requires an incumbent LEC to provide interconnection 
between its network and that of a requesting carrier at a level of 
quality that is at least indistinguishable from that which the 
incumbent provides itself, a subsidiary, an affiliate, or any other 
party. We agree with MFS that this duty requires incumbent LECs to 
design interconnection facilities to meet the same technical criteria 
and service standards, such as probability of blocking in peak hours 
and transmission standards, that are used within their own networks. 
Contrary to the view of some commenters, we further conclude that the 
equal in quality obligation imposed by section 251(c)(2) is not limited 
to the quality perceived by end users. The statutory language contains 
no such limitation, and creating such a limitation may allow incumbent 
LECs to discriminate against competitors in a manner imperceptible to 
end users, but which still provides incumbent LECs with advantages in 
the marketplace (e.g., the imposition of disparate conditions between 
carriers on the pricing and ordering of services).
    169. We also note that section 251(c)(2) requires interconnection 
that is ``at least'' equal in quality to that enjoyed by the incumbent 
LEC itself. This is a minimum requirement. Moreover, to the extent a 
carrier requests interconnection of superior or lesser quality than an 
incumbent LEC currently provides, the incumbent LEC is obligated to 
provide the requested interconnection arrangement if technically 
feasible. Requiring incumbent LECs to provide upon request higher 
quality interconnection than they provide themselves, subsidiaries, or 
affiliates will permit new entrants to compete with incumbent LECs by 
offering novel services that require superior interconnection quality. 
We also conclude that, as long as new entrants compensate incumbent 
LECs for the economic cost of the higher quality interconnection, 
competition will be promoted.

V. Access to Unbundled Network Elements

A. Commission Authority to Identify Unbundled Network Elements

1. Background
    170. Section 251(c)(3) imposes a duty on incumbent LECs to 
``provide, to any requesting telecommunications carrier for the 
provision of a telecommunications service, nondiscriminatory access to 
network elements on an unbundled basis at any technically feasible 
point on rates, terms, and conditions that are just, reasonable, and 
nondiscriminatory in accordance with the terms and conditions of the 
agreement and the requirements of this section and section 252.'' This 
section also requires incumbent LECs to provide these elements ``in a 
manner that allows requesting carriers to combine such elements in 
order to provide such telecommunications service.''
    171. Section 251(d)(1) provides that ``the Commission shall 
complete all actions necessary to establish regulations to implement 
the requirements of'' section 251 by August 8, 1996. Section 251(d)(2) 
further provides that, ``[i]n determining what network elements should 
be made available for purposes of subsection (c)(3), the Commission 
shall consider, at a minimum, whether (A) Access to such network 
elements as are proprietary in nature is necessary; and (B) the failure 
to provide access to such network elements would impair the ability of 
the telecommunications carrier seeking access to provide the services 
that it seeks to offer.''
    172. In the NPRM, we sought comment on our tentative conclusion 
that the 1996 Act requires the Commission to identify network elements 
that incumbent LECs are required to make available to requesting 
carriers on an unbundled basis under section 251(c)(3).
2. Discussion
    173. We affirm our tentative conclusion in the NPRM that the 1996 
Act requires the Commission to identify network elements that incumbent 
LECs must offer requesting carriers on an unbundled basis under section 
251(c)(3). Section 251(d)(1) directs the Commission to establish rules 
implementing the requirements of section 251(c)(3). Further, section 
251(d)(2) contemplates that, pursuant to this direction, the Commission 
will identify unbundled network elements. We conclude that neither the 
language in section 251(d), nor any other part of the 1996 Act, is 
reasonably susceptible to the interpretation advanced by BellSouth that 
our obligation to identify unbundled network elements arises only when 
we act under section 252(e)(5).

B. National Requirements for Unbundled Network Elements

1. Background
    174. In the NPRM, we noted Congress' view that, when new entrants 
begin providing services in local telephone markets, it is unlikely 
they will own network facilities that completely duplicate those of 
incumbent LECs because of the significant investment and time required 
to build such facilities. The statutory requirement imposed on 
incumbent LECs to provide access to unbundled network elements will 
permit new entrants to offer competing local services by purchasing 
from incumbents, at cost-based prices, access to elements which they do 
not already possess, unbundled from those elements that they do not 
need.
    175. It is possible that there will be sufficient demand in some 
local telephone markets to support the construction of competing local 
exchange facilities that duplicate most or even all of the elements of 
an incumbent LEC's network. In these markets new entrants will be able 
to use unbundled elements from the incumbent LEC to provide services 
until such time as they complete the construction of their own 
networks, and thus, no longer need to rely on the facilities of an 
incumbent to provide local exchange and exchange access services. It is 
also possible, however, that other local markets, now and even into the 
future, may not efficiently support duplication of all, or even some, 
of an incumbent LEC's facilities. Access to unbundled elements in these 
markets will promote efficient competition for local exchange services 
because, under the scheme set out in the 1996 Act, such access will 
allow new entrants to enter local markets by obtaining use of the 
incumbent LECs' facilities at prices that reflect the incumbents' 
economies of scale and scope.
    176. In the NPRM, we tentatively concluded that the Commission 
should identify a minimum number of elements that incumbent LECs must 
make available to requesting carriers on an unbundled basis. We further 
tentatively concluded that section 252(e)(3) preserves a state's 
authority, during arbitration, to impose additional unbundling 
requirements beyond those we specify, as long as such requirements are 
consistent with the 1996 Act and our

[[Page 45506]]

regulations. Section 252(e) discusses a state commission's obligations 
regarding the approval or rejection of agreements between incumbent 
LECs and requesting telecommunications carriers for interconnection, 
services or network elements. Subparagraph (3) of this section 
specifically provides that a state commission is not prohibited ``from 
establishing or enforcing other requirements of State law in its review 
of an agreement,'' as long as such requirements do not violate the 
terms of the statute. 47 U.S.C. Sec. 252(e)(3). We further note that 
under section 252(f)(2) states may impose additional unbundling 
requirements during review of BOC statements of generally available 
terms and conditions. Section 252(f)(2) states that ``(e)xcept as 
provided in section 253, nothing in this section shall prohibit a State 
commission from establishing or enforcing other requirements of State 
law in its review of such statement * * *'' 47 U.S.C. Sec. 252(f)(2). 
Finally, we tentatively concluded that we have authority to identify 
additional or different unbundling requirements in the future, as we 
learn about changes in technology, the innovation of new services, and 
the necessities of competition.
2. Discussion
    177. We adopt our tentative conclusion and identify a minimum list 
of unbundled network elements that incumbent LECs must make available 
to new entrants upon request. We believe the procompetitive goals of 
section 251(c)(3) will best be achieved through the adoption of such a 
list. As discussed above, we believe that negotiations and arbitrations 
will best promote efficient, rapid, and widespread new entry if we 
establish certain minimum national unbundling requirements. As the 
Department of Justice argues, there is ``no basis in economic theory or 
in experience to expect incumbent monopolists to quickly negotiate 
arrangements to facilitate disciplining entry by would-be competitors, 
absent clear legal requirements to do so.'' Ad Hoc Telecommunications 
Users Committee notes that ``[h]istorically, the [incumbent LECs] have 
had strong incentives to resist, and have actively resisted, efforts to 
open their networks to users, competitors, or new technology-driven 
applications of network technology.''
    178. National requirements for unbundled elements will allow new 
entrants, including small entities, seeking to enter local markets on a 
national or regional scale to take advantage of economies of scale in 
network design. If fifty states were to establish different unbundling 
requirements, new entrants, including small entities, could be denied 
the benefits of scale economies in obtaining access to unbundled 
elements. National requirements will also: reduce the number of issues 
states must consider in arbitrations, thereby facilitating the states' 
ability to conduct such proceedings; reduce the likelihood of 
litigation regarding the requirements of section 251(c)(3) and the 
costs associated with such litigation; and provide financial markets 
with greater certainty in assessing new entrants' business plans, thus 
enhancing the ability of new entrants, including small entities, to 
raise capital. In addition, to the extent the Commission assumes a 
state's arbitration authority under section 252(e)(5), national 
requirements for unbundled elements will help the Commission to 
conclude such proceedings expeditiously.
    179. We reject the alternative option of developing an exhaustive 
list of required unbundled elements, to which states could not add 
additional elements, on the grounds that such a list would not 
necessarily accommodate changes in technology, and it would not provide 
states the flexibility they need to deal with local conditions.
    180. We also reject the proposal advanced by several parties that 
we should adopt non-binding national guidelines for unbundled elements 
that states would not be required to enforce. The parties asserting 
that differences between incumbent LEC networks militate against the 
adoption of national standards provide few, if any, specific examples 
of what those differences are. In addition, they fail to articulate 
persuasively why those differences are significant enough to weigh 
against the adoption of national requirements. Accordingly, and as 
previously discussed, we conclude that any differences that may exist 
among states are not sufficiently great to overcome the procompetitive 
benefits that would result from establishing a minimum set of binding 
national rules. Moreover, we believe the authority granted the states 
in section 252(e)(3), as well as our existing rules which set forth a 
process by which incumbent LECs can request a waiver of the 
requirements we adopt here, will provide the necessary flexibility in 
our rules to permit states and parties to accommodate any truly unique 
state conditions that might exist. We further observed in the NPRM that 
under the voluntary negotiation paradigm set out in section 252, 
parties to such negotiations can agree to provide unbundled network 
elements that differ from those identified by the Commission. See NPRM 
at para. 78 (citing 47 U.S.C. Sec. 252(a)). Accordingly, we adopt our 
tentative conclusion that states may impose additional unbundling 
requirements pursuant to section 252(e)(3), as long as such 
requirements are consistent with the 1996 Act and our regulations. This 
conclusion is consistent with the statement in section 252(e)(3) that 
``nothing in this section shall prohibit a State commission from 
establishing or enforcing other requirements of State law in its review 
of an agreement.''
    181. We find the arguments presented by parties opposing national 
rules for unbundled elements unpersuasive especially in light of the 
1996 Act's strong procompetitive goals. For example, in light of the 
incumbent LECs' disincentives to negotiate with potential competitors, 
we believe national rules will promote competition by making the 
bargaining strength of potential competitors, including small entities, 
more equal. We are not persuaded that national rules will discourage 
incumbent LECs from developing new technologies and services; to the 
contrary, based on our experience in other telecommunications markets, 
we believe that competition will stimulate innovation by incumbent 
LECs. We also believe that any failure of incumbent LECs to develop new 
technologies or services would have a less significant adverse effect 
on competition in local exchange markets than a failure to adopt 
national rules. Nor is it likely that new entrants will seek 
unnecessary elements merely to raise incumbents' costs because such new 
entrants must pay the costs associated with unbundling. In addition, 
the pricing standard of section 252(d)(1)(B), which allows incumbent 
LECs to receive not only their costs but also a reasonable profit on 
the provision of unbundled elements, should further alleviate concerns 
regarding sham requests.
    182. We adopt our tentative conclusion that, in addition to 
identifying unbundled network elements that incumbent LECs must make 
available now, we have authority to identify additional, or perhaps 
different, unbundling requirements that would apply to incumbent LECs 
in the future. The rapid pace and ever changing nature of technological 
advancement in the telecommunications industry makes it essential that 
we retain the ability to revise our rules as circumstances change. 
Otherwise, our rules might impede technological change and frustrate 
the 1996 Act's overriding goal of bringing the benefits

[[Page 45507]]

of competition to consumers of local phone services. For the same 
reasons that we believe we should adopt national unbundling 
requirements, as discussed above, we reject the proposal that future 
unbundling requirements should be determined solely by the parties to 
voluntary negotiations.
    183. Finally, we have considered the economic impact of our rules 
in this section on small incumbent LECs. For example, we have 
considered the argument advanced by the Rural Telephone Coalition that 
national unbundling requirements would be unworkable because of 
technological, demographic and geographic variations between states. We 
do not adopt the Rural Telephone Coalition's position, however, because 
we believe that the minimum list we adopt can be applied to a broad 
range of networks across geographic regions and any differences between 
incumbent LEC networks in different states are not sufficiently great 
to overcome the procompetitive benefits of a minimum list of required 
unbundled network elements. We have also considered the argument 
advanced by GVNW that unbundling requirements imposed on small 
incumbent LECs should differ from those imposed on large, urban 
incumbent LECs because of differences in networks and operational 
procedures. We reject GVNW's proposal for two reasons. First, some 
small incumbent LECs may not experience any problems complying with our 
unbundling rules. Second, we note that section 251(f) of the 1996 Act 
provides relief to certain small LECs from our regulations implementing 
section 251.
    184. Although we have concluded in this proceeding that we can best 
achieve the procompetitive aims of the 1996 Act by adopting minimum 
national unbundling requirements for arbitrated agreements, the 1996 
Act envisions that the states will administer those requirements 
through approval of negotiated agreements and arbitrations. Through 
arbitrations and review of negotiated agreements the states will add to 
their significant expertise on issues relating to the provision of 
access to unbundled network elements. We encourage state commissions to 
take an active role in evaluating the success or difficulties in 
implementing any of our requirements. The Commission intends to draw on 
the expertise developed by the states when we review and revise our 
rules as necessary.

C. Network Elements

1. Background
    185. Section 3(29) of the Communications Act defines the term 
``network element'' to mean both ``a facility or equipment used in the 
provision of a telecommunications service'' and ``features, functions, 
and capabilities that are provided by means of such facility or 
equipment.'' Such features, functions, and capabilities include 
``subscriber numbers, databases, signaling systems, and information 
sufficient for billing and collection or used in the transmission, 
routing, or other provision of a telecommunications service.'' The 
Joint Explanatory Statement explains that ``[t]he term `network 
element' was included to describe the facilities, such as local loops, 
equipment, such as switching, and the features, functions, and 
capabilities that a local exchange carrier must provide for certain 
purposes under other sections of the conference agreement.''
    186. In the NPRM, we noted that we could identify ``network 
elements'' in two ways. First, we could identify a single ``network 
element,'' and then further subdivide it into additional ``elements.'' 
Alternatively, we could provide that, once we identify a particular 
``network element,'' it cannot be further subdivided. In the NPRM, we 
asked for comment on these two approaches.
    187. We observed in the NPRM that the statutory definition of a 
``network element'' draws a distinction between a ``facility or 
equipment used in the provision of a telecommunications service,'' and 
the ``service'' itself. We asked for comment on the meaning of this 
distinction in general, with respect to requirements for unbundling, 
and in connection with specific unbundled elements. We noted that the 
definition of a network element, i.e., a facility, function, or 
capability, is not dependent on the particular types of services that 
are provided by means of the element (e.g., interstate access, 
intrastate local exchange), and asked whether a carrier purchasing 
access to an element is obligated, pursuant to the definition, to 
provide all services typically carried or provided by that element.
2. Discussion
    188. We adopt the concept of unbundled elements as physical 
facilities of the network, together with the features, functions, and 
capabilities associated with those facilities. Carriers requesting use 
of unbundled elements within the incumbent LEC's network seek in effect 
to purchase the right to obtain exclusive access to an entire facility, 
or use of some feature, function or capability of that element. For 
some elements, especially the loop, the requesting carrier will 
purchase exclusive access to the element for a specific period, such as 
on a monthly basis. Carriers seeking other elements, especially shared 
facilities such as common transport, are essentially purchasing access 
to a functionality of the incumbent's facilities on a minute-by-minute 
basis. This concept of network elements, as discussed infra at section 
V.G., does not alter the incumbent LEC's physical control or ability or 
duty to repair and maintain network elements.
    189. We conclude that we should identify a particular facility or 
capability, for example, as a single network element, but allow 
ourselves and the states (where appropriate) the discretion to further 
identify, within that single facility or capability, additional 
required network elements. Thus, for example, in this proceeding, we 
identify the local loop as a single network element. We also ask the 
states to evaluate, on a case-by-case basis, whether to require access 
to subloop elements, which can be facilities or capabilities within the 
local loop. We agree with those commenters that argue that identifying 
a particular facility or capability as single network element, but 
allowing such elements to be further subdivided into additional 
elements, will allow our rules (as well as the states) to accommodate 
changes in technology, and thus better serve the interests of new 
entrants and incumbent LECs, and the procompetitive purposes of the 
1996 Act. We are not persuaded by PacTel's argument that it is 
unnecessary for our rules to permit the identification of additional 
elements, beyond those specifically referenced in parts of the 1996 
Act, because our rules must conform to the definition of a network 
element, and they must accommodate changes in technology. Nor are we 
persuaded by BellSouth that identification of network elements should 
be left solely to the parties. We reject this approach for the same 
reasons that led us to adopt national unbundling requirements. Finally, 
we agree with NYNEX and others that we should not identify elements in 
rigid terms, but rather by function.
    190. We agree with MCI and MFS that the definition of the term 
network element includes physical facilities, such as a loop, switch, 
or other node, as well as logical features, functions, and capabilities 
that are provided by, for example, software located in a physical 
facility such as a switch. We further agree with MCI that the embedded 
features and functions within a network element are part of the 
characteristics of that element and may not be removed from it. 
Accordingly, incumbent LECs

[[Page 45508]]

must provide network elements along with all of their features and 
functions, so that new entrants may offer services that compete with 
those offered by incumbents as well as new services.
    191. The only limitation that the statute imposes on the definition 
of a network element is that it must be ``used in the provision of a 
telecommunications service.'' Incumbent LECs provide telecommunications 
services not only through network facilities that serve as the basis 
for a particular service, or that accomplish physical delivery, but 
also through information (such as billing information) that enables 
incumbents to offer services on a commercial basis to consumers. Our 
interpretation of the term ``provision'' finds support in the 
definition of the term ``network element.'' That definition provides 
that the type of information that may constitute a feature or function 
includes information ``used in the transmission, routing or other 
provision of a telecommunications service.'' Since ``transmission'' and 
``routing'' refer to physical delivery, the phrase ``or other provision 
of a telecommunications service'' goes beyond mere physical delivery.
    192. We conclude that the definition of the term ``network 
element'' broadly includes all ``facilit[ies] or equipment used in the 
provision of a telecommunications service,'' and all ``features, 
functions, and capabilities that are provided by means of such facility 
or equipment, including subscriber numbers, databases, signaling 
systems, and information sufficient for billing and collection or used 
in the transmission, routing, or other provision of a 
telecommunications service.'' This definition thus includes, but is not 
limited to, transport trunks, call-related databases, software used in 
such databases, and all other unbundled elements that we identify in 
this proceeding. The definition also includes information that 
incumbent LECs use to provide telecommunications functions 
commercially, such as information required for pre-ordering, ordering, 
provisioning, billing, and maintenance and repair services. (The term 
``provisioning'' includes installation.) This interpretation of the 
definition of the term ``network element'' will serve to guide both the 
Commission and the states in evaluating further unbundling requirements 
beyond those we identify in this proceeding.
    193. We disagree with those incumbent LECs which argue that 
features that are sold directly to end users as retail services, such 
as vertical features, cannot be considered elements within incumbent 
LEC networks. If we were to conclude that any functionality sold 
directly to end users as a service, such as call forwarding or caller 
ID, cannot be defined as a network element, then incumbent LECs could 
provide local service to end users by selling them unbundled loops and 
switch elements, and thereby entirely evade the unbundling requirement 
in section 251(c)(3). We are confident that Congress did not intend 
such a result. We further reject Ameritech's argument that we should 
not permit carriers to use unbundled elements to provide services that 
are priced above cost at retail. We agree with those parties that argue 
that competition will not develop if we find that supracompetitive 
pricing is protected by the 1996 Act.
    194. Moreover, we agree with those commenters that argue that 
network elements are defined by facilities or their functionalities or 
capabilities, and thus, cannot be defined as specific services. A 
single network element could be used to provide many different 
services. For example, a local loop can be used to provision inter- and 
intrastate exchange access services, as well as local exchange 
services. We conclude, consistent with the findings of the Ohio and 
Oregon Commissions, that the plain language of section 251(c)(3) does 
not obligate carriers purchasing access to network elements to provide 
all services that an unbundled element is capable of providing or that 
are typically offered over that element. Section 251(c)(3) does not 
impose any service-related restrictions or requirements on requesting 
carriers in connection with the use of unbundled elements.

D. Access to Network Elements

1. Background
    195. In the NPRM, we observed that section 251(c)(3) requires 
incumbent LECs to provide ``access'' to network elements ``on an 
unbundled basis.'' We interpreted these terms to mean that incumbent 
LECs must provide carriers with the functionality of a particular 
element, separate from the functionality of other elements, and must 
charge a separate fee for each element. We sought comment on this 
interpretation and any alternative interpretations.
2. Discussion
    196. We conclude that we should adopt our proposed interpretation 
that the terms ``access'' to network elements ``on an unbundled basis'' 
mean that incumbent LECs must provide the facility or functionality of 
a particular element to requesting carriers, separate from the facility 
or functionality of other elements, for a separate fee. We further 
conclude that a telecommunications carrier purchasing access to an 
unbundled network facility is entitled to exclusive use of that 
facility for a period of time, or when purchasing access to a feature, 
function, or capability of a facility, a telecommunications carrier is 
entitled to use of that feature, function, or capability for a period 
of time. The specified period may vary depending on the terms of the 
agreement between the incumbent LEC and the requesting carrier. The 
ability of other carriers to obtain access to a network element for 
some period of time does not relieve the incumbent LEC of the duty to 
maintain, repair, or replace the unbundled network element. We clarify 
that title to unbundled network elements will not shift to requesting 
carriers. We reject PacTel's interpretation of the terms quoted above 
because it is inconsistent with our definition of the term network 
element (i.e., an element includes all features and functions embedded 
in it). Moreover, to the extent that PacTel's argument suggests that 
the 1996 Act does not require unbundled elements to be provisioned in a 
way that would make them useful, we find that its statutory 
interpretation is inconsistent with the statute's goal of providing new 
entrants with realistic means of competing against incumbents.
    197. We further conclude that ``access'' to an unbundled element 
refers to the means by which requesting carriers obtain an element's 
functionality in order to provide a telecommunications service. Just as 
section 251(c)(2) requires ``interconnection * * * at any technically 
feasible point,'' section 251(c)(3) requires ``access * * * at any 
technically feasible point.'' We conclude, based on the terms of 
sections 251 (c)(2), 251(c)(3), and 251(c)(6), that an incumbent LEC's 
duty to provide ``access'' constitutes a duty to provide a connection 
to a network element independent of any duty imposed by subsection 
(c)(2). Thus, such ``access'' must be provided under the rates, terms, 
and conditions that apply to unbundled elements.
    198. Specifically, section 251(c)(6) provides that incumbent LECs 
must provide ``physical collocation of equipment necessary for 
interconnection or access to unbundled network elements.'' The use of 
the term ``or'' in this phrase means that interconnection is different 
from ``access'' to unbundled elements. The text of sections 251(c)(2) 
and (c)(3) leads to the same conclusion. Section 251(c)(2) requires 
that interconnection be provided for ``the transmission and

[[Page 45509]]

routing of telephone exchange service and exchange access.'' Section 
251(c)(3), in contrast, requires the provision of access to unbundled 
elements to allow requesting carriers to provide ``a telecommunications 
service.'' The term ``telecommunications service'' by definition 
includes a broader range of services than the terms ``telephone 
exchange service and exchange access.'' Subsection (c)(3), therefore, 
allows unbundled elements to be used for a broader range of services 
than subsection (c)(2) allows for interconnection. If we were to 
conclude that ``access'' to unbundled elements under subsection (c)(3) 
could only be achieved by means of interconnection under subsection 
(c)(2), we would be limiting, in effect, the uses to which unbundled 
elements may be put, contrary to the plain language of section 
251(c)(3) and standard canons of statutory construction.

E. Standards Necessary To Identify Unbundled Network Elements

1. Background
    199. In the NPRM, we raised a number of issues concerning the 
meaning of technical feasibility in connection with unbundled elements. 
We also sought comment on the extent to which the Commission should 
consider the standards set forth in section 251(d)(2) in identifying 
required unbundled elements, and on how we ought to interpret these 
standards. Subsection (d)(2) provides that ``(i)n determining what 
network elements should be made available for purposes of subsection 
(c)(3), the Commission shall consider, at a minimum'' the following two 
standards, ``whether (A) access to such network elements as are 
proprietary in nature is necessary; and (B) the failure to provide 
access to such network elements would impair the ability of the 
telecommunications carrier seeking access to provide the services that 
it seeks to offer.'' We further asked about the relationship between 
the latter standard and the requirement in section 251(c)(3) that 
carriers be able to use unbundled elements to provide a 
telecommunications service.
2. Discussion
    200. Sections 251(c)(3) and 251(d)(2) set forth standards the 
Commission must consider in identifying unbundled network elements that 
incumbent LECs must make available in connection with arbitrations 
before state commissions and BOC statements of generally available 
terms and conditions. These standards guide the unbundling requirements 
we issue today as well as any different or additional unbundling 
requirements we may issue in the future. Similarly, the States must 
follow our interpretation of these standards to the extent they impose 
additional unbundling requirements during arbitrations or subsequent 
rulemaking proceedings.
    201. Section 251(c)(3) requires incumbent LECs to provide 
requesting carriers with ``nondiscriminatory access to network elements 
on an unbundled basis at any technically feasible point.'' We find that 
this clause imposes on an incumbent LEC the duty to provide all network 
elements for which it is technically feasible to provide access on an 
unbundled basis. Because section 251(d)(1) requires us to ``establish 
regulations to implement the requirements of'' section 251(c)(3), we 
conclude that we have authority to establish regulations that are 
coextensive with the duty section 251(c)(3) imposes on incumbent LECs.
    202. Section 251(d)(2), however, sets forth standards that do not 
depend on technical feasibility. More specifically, section 251(d)(2) 
provides that, in identifying unbundled elements, the Commission shall 
``consider, at a minimum,'' whether access to proprietary elements is 
necessary (the ``proprietary standard''), and whether requesting 
carriers' ability to provide services would be impaired if the desired 
elements were not provided by an incumbent LEC (the ``impairment 
standard.'') Thus, section 251(d)(2) gives us the authority to decline 
to require incumbent LECs to provide access to unbundled network 
elements at technically feasible points if, for example, we were to 
conclude that access to a particular proprietary element is not 
necessary. To give effect to both sections 251(c)(3) and 251(d)(2), we 
conclude that the proprietary and impairment standards in section 
251(d)(2) grant us the authority to refrain from requiring incumbent 
LECs to provide all network elements for which it is technically 
feasible to provide access on an unbundled basis. The authority we 
derive from section 251(d)(2) is limited, however, by our 
interpretation of these standards, and this section, as set forth 
below.
    203. We agree with BellSouth, SBC, and others that the plain import 
of the ``at minimum'' language in section 251(d)(2) requires us, in 
identifying unbundled network elements, to ``consider'' the standards 
enumerated there, as well as other standards we believe are consistent 
with the objectives of the 1996 Act. We conclude that the word 
``consider'' means we must weigh the standards enumerated in section 
251(d)(2) in evaluating whether to require the unbundling of a 
particular element.
    204. We further conclude that, in evaluating whether to impose 
additional unbundling requirements during the arbitration process, 
States must apply our definition of technical feasibility, discussed 
above in section IV.D. A determination of technical feasibility would 
then create a presumption in favor of requiring an incumbent LEC to 
provide the element. If providing access to an unbundled element is 
technically feasible, a State must then consider the standards set 
forth in section 251(d)(2), as we interpret them below. Similarly, the 
Commission will apply this analysis where we must arbitrate specific 
unbundling issues, under section 252(e)(5), and in future rulemaking 
proceedings that may consider additional or possibly different 
unbundling requirements.
    205. Section 251(d)(2)(A) requires the Commission and the States to 
consider whether access to proprietary elements is ``necessary.'' 
``Necessary'' means, in this context, that an element is a prerequisite 
for competition. We believe that, in some instances, it will be 
``necessary'' for new entrants to obtain access to proprietary elements 
(e.g., elements with proprietary protocols or elements containing 
proprietary information), because without such elements, their ability 
to compete would be significantly impaired or thwarted. As noted supra, 
a number of commenters argue that section 251(d)(2)(A) requires us to 
protect proprietary information, such as CPNI information, contained in 
network elements. We intend to treat issues regarding CPNI in our 
rulemaking proceeding on CPNI information. Telecommunications Carriers' 
Use of Customer Proprietary Network Information and Other Customer 
Information, CC Docket No. 96-115, Notice of Proposed Rulemaking, FCC 
96-221, 61 FR 26483 (May 28, 1996). Thus, as an initial matter, we 
decline to adopt a general rule, as suggested by some incumbents, that 
would prohibit access to such elements, or make access available only 
upon a carrier demonstrating a heavy burden of need. We acknowledge 
that prohibiting incumbents from refusing access to proprietary 
elements could reduce their incentives to offer innovative services. We 
are not persuaded, however, that this is a sufficient reason to 
prohibit generally the unbundling of proprietary elements, because the 
threat to competition from any such prohibition would far exceed any 
costs to

[[Page 45510]]

consumers resulting from reduced innovation by the incumbent LEC. In 
this proceeding, for example, we are requiring incumbent LECs to 
provide the local switching element which includes vertical features 
that some carriers contend are proprietary. See infra, Section V.J. 
Moreover, the procompetitive effects of our conclusion generally will 
stimulate innovation in the market, offsetting any hypothetical 
reduction in innovation by the incumbent LECs.
    206. We further conclude that, to the extent new entrants seek 
additional elements beyond those we identify herein, section 
251(d)(2)(A) allows the Commission and the states to require the 
unbundling of such elements unless the incumbent can prove to a state 
commission that: (1) The element is proprietary, or contains 
proprietary information that will be revealed if the element is 
provided on an unbundled basis; and (2) a new entrant could offer the 
same proposed telecommunications service through the use of other, 
nonproprietary unbundled elements within the incumbent's network. We 
believe this interpretation of section 251(d)(2)(A) will best advance 
the procompetitive purposes of the 1996 Act. It allows new entrants to 
obtain proprietary elements from incumbent LECs where they are 
necessary to offer a telecommunications service, and, at the same time, 
it gives incumbents the opportunity to argue, before the states or the 
Commission, against unbundling proprietary elements where a new entrant 
could offer the same service using other unbundled elements in the 
incumbent's network. We decline to adopt the interpretation of section 
251(d)(2)(A) advanced by some incumbents that incumbent LECs need not 
provide proprietary elements if requesting carriers can obtain the 
requested proprietary element from a source other than the incumbent. 
Requiring new entrants to duplicate unnecessarily even a part of the 
incumbent's network could generate delay and higher costs for new 
entrants, and thereby impede entry by competing local providers and 
delay competition, contrary to the goals of the 1996 Act.
    207. We further conclude that, to the extent new entrants do not 
need access to all the proprietary information contained within an 
element in order to provide a telecommunications service, the 
Commission and the states may take action to protect the proprietary 
information. For example, to provide a telecommunications service, a 
new entrant might need access to information about a particular 
customer that is in an incumbent LEC database. The database to which 
the new entrant requires access, however, may contain proprietary 
information about all of the incumbent LECs' customers. In this 
circumstance, the new entrant should not have access to proprietary 
information about the incumbent LEC's other customers where it is not 
necessary to provide service to the new entrant's particular customer. 
Accordingly, we believe the Commission and the states have the 
authority to protect the confidentiality of proprietary information in 
an unbundled network element, such as a database, where that 
information is not necessary to enable a new entrant to offer a 
telecommunications service to its particular customer.
    208. Section 251(d)(2)(B) requires us to consider whether the 
failure to provide access to an element would ``impair'' the ability of 
a new entrant to provide a service it seeks to offer. The term 
``impair'' means ``to make or cause to become worse; diminish in 
value.'' We believe, generally, that an entrant's ability to offer a 
telecommunications service is ``diminished in value'' if the quality of 
the service the entrant can offer, absent access to the requested 
element, declines and/or the cost of providing the service rises. We 
believe we must consider this standard by evaluating whether a carrier 
could offer a service using other unbundled elements within an 
incumbent LEC's network. Accordingly, we interpret the ``impairment'' 
standard as requiring the Commission and the states, when evaluating 
unbundling requirements beyond those identified in our minimum list, to 
consider whether the failure of an incumbent to provide access to a 
network element would decrease the quality, or increase the financial 
or administrative cost of the service a requesting carrier seeks to 
offer, compared with providing that service over other unbundled 
elements in the incumbent LEC's network.
    209. We decline to adopt the interpretation of the ``impairment'' 
standard advanced by most BOCs and GTE. Under their interpretation, 
incumbent LECs must provide unbundled elements only when the failure to 
do so would prevent a carrier from offering a service. We also reject 
the related interpretations that carriers are not impaired in their 
ability to provide a service if they can obtain elements from another 
source, or if they can provide the proposed service by purchasing the 
service at wholesale rates from a LEC. In general, and as discussed 
above, section 251(c)(3) imposes on incumbent LECs the obligation to 
offer on an unbundled basis all network elements for which it is 
technically feasible to provide access. We believe the plain language 
of section 251(d)(2), and the standards articulated there, give us the 
discretion to limit the general obligation imposed by subsection 
251(c)(3), but they do not require us to do so. The standards set forth 
in section 251(d)(2) are minimum considerations that the Commission 
shall take into account in evaluating unbundling requirements. 
Accordingly, we conclude that the statute does not require us to 
interpret the ``impairment'' standard in a way that would significantly 
diminish the obligation imposed by section 251(c)(3).
    210. The interpretation advanced by most of the BOCs and GTE, 
described above, means that, if a requesting carrier could obtain an 
element from a source other than the incumbent, then the incumbent need 
not provide the element. We agree with the reasoning advanced by some 
of the commenters that this interpretation would nullify section 
251(c)(3) because, in theory, any new entrant could provide all of the 
elements in the incumbents' networks. Congress made it possible for 
competitors to enter local markets through the purchase of unbundled 
elements because it recognized that duplication of an incumbent's 
network could delay entry, and could be inefficient and unnecessary. 
The interpretation proffered by the BOCs and GTE would inhibit new 
entry and thus restrict the potential for meaningful competition, which 
would undermine the procompetitive goals of the 1996 Act. As a 
practical matter, if it is more efficient and less costly for new 
entrants to obtain network elements from a source other than an 
incumbent LEC, new entrants will likely pursue the more efficient and 
less costly approach. Additionally, as discussed above at section IV.C, 
we believe that allowing incumbent LECs to deny access to unbundled 
elements on the grounds that an element is equivalent to a service 
available at resale would lead to impractical results, because 
incumbents could completely avoid section 251(c)(3)'s unbundling 
obligations by offering unbundled elements to end users as retail 
services.
    211. Finally, we decline at this time to adopt any of the 
additional criteria proposed by commenters. We conclude that none of 
the additional factors suggested by commenters enhances our ability to 
identify unbundled network elements consistent with the procompetitive 
goals of the 1996 Act. These additional considerations would limit 
unbundling requirements or make it administratively more difficult for

[[Page 45511]]

new entrants to obtain additional unbundled elements beyond those 
identified in our minimum list of required elements. For example, we 
believe that the proposal that new entrants must provide detailed 
estimates regarding projected market demand is not necessary for 
incumbent LECs to efficiently plan for network growth.

F. Provision of a Telecommunications Service Using Unbundled Network 
Elements

1. Background
    212. Section 251(c)(3) provides that an incumbent LEC must provide 
access to ``unbundled network elements in a manner that allows 
requesting carriers to combine such elements in order to provide'' a 
telecommunications service. In the NPRM, we sought comment on the 
meaning of this requirement.
2. Discussion
    213. Under section 251(c)(3), incumbent LECs must provide access to 
``unbundled network elements in a manner that allows requesting 
carriers to combine such elements in order to provide'' a 
telecommunications service. We agree with the Illinois Commission, the 
Texas Public Utility Counsel, and others that this language bars 
incumbent LECs from imposing limitations, restrictions, or requirements 
on requests for, or the sale or use of, unbundled elements that would 
impair the ability of requesting carriers to offer telecommunications 
services in the manner they intend. For example, incumbent LECs may not 
restrict the types of telecommunications services requesting carriers 
may offer through unbundled elements, nor may they restrict requesting 
carriers from combining elements with any technically compatible 
equipment the requesting carriers own. We also conclude that section 
251(c)(3) requires incumbent LECs to provide requesting carriers with 
all of the functionalities of a particular element, so that requesting 
carriers can provide any telecommunications services that can be 
offered by means of the element. We believe this interpretation 
provides new entrants with the requisite ability to use unbundled 
elements flexibly to respond to market forces, and thus is consistent 
with the procompetitive goals of the 1996 Act.
    214. We agree with AT&T and Comptel that the quoted text in section 
251(c)(3) bars incumbent LECs from separating elements that are ordered 
in combination, unless a requesting carrier specifically asks that such 
elements be separated. We also conclude that the quoted text requires 
incumbent LECs, if necessary, to perform the functions necessary to 
combine requested elements in any technically feasible manner either 
with other elements from the incumbent's network, or with elements 
possessed by new entrants, subject to the technical feasibility 
restrictions discussed below. We adopt these conclusions for two 
reasons. First, in practice it would be impossible for new entrants 
that lack facilities and information about the incumbent's network to 
combine unbundled elements from the incumbents' network without the 
assistance of the incumbent. If we adopted NYNEX's proposal, we believe 
requesting carriers would be seriously and unfairly inhibited in their 
ability to use unbundled elements to enter local markets. We therefore 
reject NYNEX's contention that the statute requires requesting 
carriers, rather than incumbents, to combine elements. We do not 
believe it is possible that Congress, having created the opportunity to 
enter local telephone markets through the use of unbundled elements, 
intended to undermine that opportunity by imposing technical 
obligations on requesting carriers that they might not be able to 
readily meet.
    215. Second, given the practical difficulties of requiring 
requesting carriers to combine elements that are part of the incumbent 
LEC's network, we conclude that section 251(c)(3) should be read to 
require incumbent LECs to combine elements requested by carriers. More 
specifically, section 251(c)(3) provides that incumbent LECs must 
provide unbundled elements ``in a manner that allows requesting 
carriers to combine them'' to provide a telecommunications service. We 
believe this phrase means that incumbents must provide unbundled 
elements in a way that enables requesting carriers to combine them to 
provide a service. The phrase ``allows requesting carriers to combine 
them,'' does not impose the obligation of physically combining elements 
exclusively on requesting carriers. Rather, it permits a requesting 
carrier to combine the elements if the carrier is reasonably able to do 
so. If the carrier is unable to combine the elements, the incumbent 
must do so. In this context, we conclude that the term ``combine'' 
means connecting two or more unbundled network elements in a manner 
that would allow a requesting carrier to offer the telecommunications 
service it seeks to offer.
    216. Our conclusion that incumbent LECs must combine unbundled 
elements when so requested is consistent with the method we have 
adopted to identify unbundled network elements. Under our method, 
incumbents must provide, as a single, combined element, facilities that 
could comprise more than one element. This means, for example, that, if 
the states require incumbent LECs to provision subloop elements, 
incumbent LECs must still provision a local loop as a single, combined 
element when so requested, because we identify local loops as a single 
element in this proceeding.
    217. We decline to adopt the view proffered by some parties that 
incumbents must combine network elements in any technically feasible 
manner requested. This proposal necessarily means that carriers could 
request incumbent LECs to combine elements that are not ordinarily 
combined in the incumbent's network. We are concerned that, in some 
instances, this could potentially affect the reliability and security 
of the incumbent's network, and the ability of other carriers to obtain 
interconnection, or request and use unbundled elements. Accordingly, 
incumbent LECs are required to perform the functions necessary to 
combine those elements that are ordinarily combined within their 
network, in the manner in which they are typically combined. Incumbent 
LECs are also required to perform the functions necessary to combine 
elements, even if they are not ordinarily combined in that manner, or 
they are not ordinarily combined in the incumbent's network, provided 
that such combination is technically feasible, and such combination 
would not undermine the ability of other carriers to access unbundled 
elements or interconnect with the incumbent LEC's network. As discussed 
in Section IV, effects on network reliability and security are factors 
to be considered in determining technical feasibility. Incumbent LECs 
must prove to state commissions that a request to combine particular 
elements in a particular manner is not technically feasible, or that 
the request would undermine the ability of other carriers to access 
unbundled elements and interconnect because they have the information 
to support such a claim.
    218. We agree with Sprint and the Florida Commission, respectively, 
that in some cases incumbent LECs may be required to provision a 
particular element in different ways, depending on the service a 
requesting carrier seeks to offer; and, in other instances, where a new 
entrant needs a particular variant of an element to offer a service, 
that element should be treated as distinct from other variants of the 
element. This means, for example, that we will treat

[[Page 45512]]

local loops with a particular type of conditioning as distinct elements 
that are different from loops with other types of conditioning. As 
discussed below, we agree with CompTel that incumbent LECs must provide 
the operational and support systems necessary for requesting carriers 
to purchase and combine network elements. Incumbent LECs use these 
systems to provide services to their own end users, and new entrants 
similarly must have access to them to provide telecommunications 
services using unbundled elements. Finally, we agree with BellSouth 
that requesting carriers must specify to incumbent LECs the network 
elements they seek before they can obtain such elements on an unbundled 
basis. We do not believe, however, that it will always be possible for 
new entrants to do this either before negotiations (or arbitrations) 
begin, or before they end, because new entrants will likely lack 
knowledge about the facilities and capabilities of a particular 
incumbent LEC's network. We further believe that incumbent LECs must 
work with new entrants to identify the elements the new entrants will 
need to offer a particular service in the manner the new entrants 
intend.

G. Nondiscriminatory Access to Unbundled Network Elements and Just, 
Reasonable and Nondiscriminatory Terms and Conditions for the Provision 
of Unbundled Network Elements

1. Background
    219. Section 251(c)(3) requires incumbent LECs to provide 
requesting carriers ``nondiscriminatory access to network elements on 
an unbundled basis * * * on rates, terms, and conditions that are just, 
reasonable, and nondiscriminatory.'' In the NPRM, we sought comment on 
whether we should adopt minimum national requirements governing the 
terms and conditions for the provision of unbundled network elements. 
We further asked what rules could ensure that the terms and conditions 
for access to unbundled network elements are just, reasonable and 
nondiscriminatory, and how we should enforce such rules. In particular, 
we sought comment on whether we should adopt uniform national rules 
governing provisioning, service, maintenance, technical standards and 
nondiscrimination safeguards in connection with the provision of 
unbundled network elements. We also asked whether we should consider 
any of the terms and conditions applicable to the provision of access 
to unbundled elements in evaluating BOC applications to provide in-
region interLATA services under section 271(b).
2. Discussion
    220. We agree with those commenters, including the Florida, 
Illinois and Washington Commissions, that to achieve the procompetitive 
goals of the 1996 Act, it is necessary to establish rules that define 
the obligations of incumbent LECs to provide nondiscriminatory access 
to unbundled network elements, and to provide such elements on terms 
and conditions that are just, reasonable and nondiscriminatory. As 
discussed above at sections II.A, II.B and V.B, we believe that 
incumbent LECs have little incentive to facilitate the ability of new 
entrants, including small entities, to compete against them and, thus, 
have little incentive to provision unbundled elements in a manner that 
would provide efficient competitors with a meaningful opportunity to 
compete. We are also cognizant of the fact that incumbent LECs have the 
incentive and the ability to engage in many kinds of discrimination. 
For example, incumbent LECs could potentially delay providing access to 
unbundled network elements, or they could provide them to new entrants 
at a degraded level of quality.
    221. Consistent with arguments advanced by the Florida and 
Washington Commissions, incumbent LECs, and potential competitors, and 
as more fully discussed in the specific sections below, we adopt 
general, national rules defining ``nondiscriminatory access'' to 
unbundled network elements, and ``just, reasonable, and 
nondiscriminatory'' terms and conditions for the provision of such 
elements. We have chosen this approach, rather than allowing states 
exclusively to consider these issues, because we believe that some 
national rules regarding nondiscriminatory access will reduce the costs 
of entry and speed the development of competition.
    222. We conclude, for example, that national rules defining the 
1996 Act's requirements regarding nondiscriminatory access to, and 
provision of, unbundled elements will reduce costs associated with 
potential litigation over these issues, and will enable states to 
conduct arbitrations more quickly by reducing the number of issues they 
must consider. Such rules will also facilitate the ability of the 
Commission to conduct arbitrations, should we assume a state's 
responsibilities under section 252(e)(5). We conclude further that such 
rules will create some uniformity across states in connection with the 
terms under which new entrants may obtain access to network elements, 
thus facilitating the ability of potential competitors, including small 
entities, to enter local markets on a regional or national scale. 
Accordingly, for all of these reasons, we reject the arguments of 
PacTel and USTA that we should not adopt national rules relating to 
incumbent LEC obligations to provide access to, and provision, 
unbundled elements in a nondiscriminatory manner.
    223. The record compiled in this proceeding supports the adoption 
of uniform general rules that rely on states to develop more specific 
requirements in arbitrations and other state proceedings. More 
significantly, however, we agree with the California and Florida 
Commissions that the states are best situated to issue specific rules 
because of their existing knowledge regarding incumbent LEC networks, 
capabilities, and performance standards in their separate jurisdictions 
and because of the role they will play in conducting mediations, 
arbitrations, and approving agreements. We expect that the states will 
implement the general nondiscrimination rules set forth herein by 
adopting, inter alia, specific rules determining the timing in which 
incumbent LECs must provision certain elements, and any other specific 
conditions they deem necessary to provide new entrants, including small 
competitors, with a meaningful opportunity to compete in local exchange 
markets. The states will continue to gain expertise in connection with 
issues relating to just, reasonable, and nondiscriminatory access and 
provision of unbundled network elements. We expect to turn to the 
states, and rely on the expertise they develop in this area, when we 
review and revise our rules as necessary.
    224. We agree with those commenters that argue that incumbent LECs 
should be required to fulfill some type of reporting requirement to 
ensure that they provision unbundled elements in a nondiscriminatory 
manner. We believe the record is insufficient at this time to adopt 
such requirements, and we may reexamine this issue in the future. We 
encourage the states, however, to adopt reporting requirements. We 
decline to address whether the Commission should consider any of the 
terms and conditions adopted here in evaluating BOC applications to 
provide in-region long distance services. We will consider this issue, 
as it arises, when we evaluate individual BOC applications.
a. Nondiscriminatory Access to Unbundled Network Elements
    225. We conclude that the obligation to provide ``nondiscriminatory 
access to

[[Page 45513]]

network elements on an unbundled basis'' refers to both the physical or 
logical connection to the element and the element itself. In 
considering how to implement this obligation in a manner that would 
achieve the 1996 Act's goal of promoting local exchange competition, we 
recognize that new entrants, including small entities, would be denied 
a meaningful opportunity to compete if the quality of the access to 
unbundled elements provided by incumbent LECs, as well as the quality 
of the elements themselves, were lower than what the incumbent LECs 
provide to themselves. Thus, we conclude it would be insufficient to 
define the obligation of incumbent LECs to provide ``nondiscriminatory 
access'' to mean that the quality of the access and unbundled elements 
incumbent LECs provide to all requesting carriers is the same. As 
discussed above with respect to interconnection, an incumbent LEC could 
potentially act in a nondiscriminatory manner in providing access or 
elements to all requesting carriers, while providing preferential 
access or elements to itself. Accordingly, we conclude that the phrase 
``nondiscriminatory access'' in section 251(c)(3) means at least two 
things: first, the quality of an unbundled network element that an 
incumbent LEC provides, as well as the access provided to that element, 
must be equal between all carriers requesting access to that element; 
second, where technically feasible, the access and unbundled network 
element provided by an incumbent LEC must be at least equal-in-quality 
to that which the incumbent LEC provides to itself. We note that 
providing access or elements of lesser quality than that enjoyed by the 
incumbent LEC would also constitute an ``unjust'' or ``unreasonable'' 
term or condition.
    226. We believe that Congress set forth a ``nondiscriminatory 
access'' requirement in section 251(c)(3), rather then an absolute 
equal-in-quality requirement, such as that set forth in section 
251(c)(2)(C), because, in rare circumstances, it may be technically 
infeasible for incumbent LECs to provide requesting carriers with 
unbundled elements, and access to such elements, that are equal-in-
quality to what the incumbent LECs provide themselves. According to 
some commenters, this problem arises in connection with one variant of 
one of the unbundled network elements we identify in this order. These 
commenters argue that a carrier purchasing access to a 1AESS local 
switch may not be able to receive, for example, the full measure of 
customized routing features that such a switch may afford the 
incumbent. In the rare circumstances where it is technically infeasible 
for an incumbent LEC to provision access or elements that are equal-in-
quality, we believe disparate access would not be inconsistent with the 
nondiscrimination requirement. Accordingly, we require incumbent LECs 
to provide access and unbundled elements that are at least equal-in-
quality to what the incumbent LECs provide themselves, and allow for an 
exception to this requirement only where it is technically infeasible 
to meet. The exception described here does not excuse incumbent LECs 
from the obligation to modify elements within their networks to allow 
requesting carriers to obtain access to such elements where this is 
technically feasible. See supra, Section IV.D. We expect incumbent LECs 
to fulfill this requirement in nearly all instances where they 
provision unbundled elements because we believe the technical 
infeasibility problem will arise rarely. We further conclude, however, 
that the incumbent LEC must prove to a state commission that it is 
technically infeasible to provide access to unbundled elements, or the 
unbundled elements themselves, at the same level of quality that the 
incumbent LEC provides to itself.
    227. Our conclusion that an incumbent LEC must provide unbundled 
elements, as well as access to them, that is ``at least'' equal in 
quality to that which the incumbent provides itself, does not excuse 
incumbent LECs from providing, when requested and where technically 
feasible, access or unbundled elements of higher quality. An incumbent 
LEC, in accommodating a carrier's request for a particular unbundled 
element, may ultimately provision an element that is higher in quality 
than what the incumbent provides to itself. See infra, Section V.J.1. 
As we discuss below, we do not believe that this obligation is unduly 
burdensome to incumbent LECs because the 1996 Act requires a requesting 
carrier to pay the costs of unbundling, and thus incumbent LECs will be 
fully compensated for any efforts they make to increase the quality of 
access or elements within their own network. (See infra, Section V.J. 
We require, for example, that incumbent LECs provide local loops 
conditioned to enable the provision of digital services (where 
technically feasible) even if the incumbent does not itself provide 
such digital services.) Moreover, to the extent this obligation allows 
new entrants, including small entities, to offer services that are 
different from those offered by the incumbent, we believe it is 
consistent with Congress's goal to promote local exchange competition. 
We note that, to the extent an incumbent LEC provides an element with a 
superior level of quality to a particular carrier, the incumbent LEC 
must provide all other requesting carriers with the same opportunity to 
obtain that element with the equivalent higher level of quality. We 
further note that where a requesting carrier specifically requests 
access or unbundled elements that are lower in quality to what the 
incumbent LECs provide themselves, incumbent LECs may offer such 
inferior quality if it is technically feasible. Finally, we conclude 
that the incumbent LEC must prove to a state commission that it is 
technically infeasible to provide access to unbundled elements, or the 
unbundled elements themselves, at a level of quality that is superior 
to or lower than what the incumbent LEC provides to itself.
b. Just, Reasonable and Nondiscriminatory Terms and Conditions for the 
Provision of Unbundled Network Elements
    228. The duty to provide unbundled network elements on ``terms, and 
conditions that are just, reasonable, and nondiscriminatory'' means, at 
a minimum, that whatever those terms and conditions are, they must be 
offered equally to all requesting carriers, and where applicable, they 
must be equal to the terms and conditions under which the incumbent LEC 
provisions such elements to itself. We also conclude that, because 
section 251(c)(3) includes the terms ``just'' and ``reasonable,'' this 
duty encompasses more than the obligation to treat carriers equally. 
Interpreting these terms in light of the 1996 Act's goal of promoting 
local exchange competition, and the benefits inherent in such 
competition, we conclude that these terms require incumbent LECs to 
provide unbundled elements under terms and conditions that would 
provide an efficient competitor with a meaningful opportunity to 
compete. Such terms and conditions should serve to promote fair and 
efficient competition. This means, for example, that incumbent LECs may 
not provision unbundled elements that are inferior in quality to what 
the incumbent provides itself because this would likely deny an 
efficient competitor a meaningful opportunity to compete. We reach this 
conclusion because providing new entrants, including small entities, 
with a

[[Page 45514]]

meaningful opportunity to compete is a necessary precondition to 
obtaining the benefits that the opening of local exchange markets to 
competition is designed to achieve.
    229. As is more fully discussed below, to enable new entrants, 
including small entities, to share the economies of scale, scope, and 
density within the incumbent LECs' networks, we conclude that incumbent 
LECs must provide carriers purchasing access to unbundled network 
elements with the pre-ordering, ordering, provisioning, maintenance and 
repair, and billing functions of the incumbent LECs operations support 
systems. (The term ``provisioning'' includes installation.) Moreover, 
the incumbent must provide access to these functions under the same 
terms and conditions that they provide these services to themselves or 
their customers. We discuss specific terms and conditions applicable to 
the unbundled elements identified in this order below, in Section V.J.

H. The Relationship Between Sections 251(c)(3) and 251(c)(4)

1. Background
    230. Section 251(c)(4) provides that incumbent LECs must offer 
``for resale at wholesale rates any telecommunications service that the 
carrier provides at retail to subscribers that are not 
telecommunications carriers.'' In the NPRM, we asked for comment on the 
relationship between this provision and section 251(c)(3). 
Specifically, we asked whether carriers can order and combine network 
elements to offer the same services that incumbent LECs offer for 
resale under section 251(c)(4). We observed that different pricing 
standards under section 252(d) apply to unbundled elements under 
section 251(c)(3) and resold services under section 251(c)(4), and that 
section 251(c)(3) contemplates the purchase of unseparated facilities 
(i.e., facilities that can be used for either inter- or intrastate 
services) while subsection (c)(4) does not necessarily contemplate 
this. We asked for comment on the implications or significance of these 
differences.
2. Discussion
    231. The language of section 251(c)(3) is cast exclusively in terms 
of obligations imposed on incumbent LECs, and it does not discuss, 
reference, or suggest a limitation or requirement in connection with 
the right of new entrants to obtain access to unbundled elements. We 
conclude, therefore, that Congress did not intend section 251(c)(3) to 
be read to contain any requirement that carriers must own or control 
some of their own local exchange facilities before they can purchase 
and use unbundled elements to provide a telecommunications service. We 
note that the Illinois Commission has reached the same conclusion.
    232. We reject the arguments advanced by Bell Atlantic and NYNEX 
that the language of section 251(c)(3) requires carriers seeking access 
to unbundled elements to own some local exchange facilities, and that 
this serves to distinguish section 251(c)(3) from section 251(c)(4). 
The ``at any technically feasible point'' language in section 251(c)(3) 
refers to points in an incumbent LEC's network where new entrants may 
obtain access to elements. It does not, however, require that new 
entrants interconnect local exchange facilities which they own or 
control at that technically feasible access point. If we were to 
conclude otherwise, then new entrants would be prohibited from 
requesting two network elements that are connected to each other 
because the new entrant would be required to connect a single network 
element to a facility of its own. The 1996 Act, however, does not 
impose any limitations on carriers' ability to obtain access to 
unbundled network elements. Moreover, we conclude that Congress did not 
intend to limit access to unbundled elements in this manner because 
such a limit would seriously inhibit the ability of potential 
competitors to enter local markets through the use of unbundled 
elements, and thus would retard the development of local exchange 
competition. We also reject NYNEX's argument that the phrase ``such 
telecommunications service'' excludes services provided by the 
incumbent. This interpretation is inconsistent with the 1996 Act's 
definition of a telecommunications service, which includes all 
telecommunications services provided by an incumbent.
    233. We also reject the argument that language in the Joint 
Explanatory Statement requires us to conclude that carriers must own 
facilities to obtain access to unbundled elements. Congress may have 
recognized that carriers that own some of their own facilities will 
more likely benefit by entering local markets through unbundled 
elements rather than resale, but this consideration does not imply that 
carriers must own their own facilities to obtain access to unbundled 
elements.
    234. We are not persuaded that, in order to give meaning and effect 
to section 251(c)(4), we must require new entrants to own some local 
exchange facilities in order to obtain access to unbundled elements. We 
disagree with the premise that no carrier would consider entering local 
markets under the terms of section 251(c)(4) if it could use recombined 
network elements solely to offer the same or similar services that 
incumbents offer for resale. We believe that sections 251(c)(3) and 
251(c)(4) present different opportunities, risks, and costs in 
connection with entry into local telephone markets, and that these 
differences will influence the entry strategies of potential 
competitors. We therefore find that it is unnecessary to impose a 
limitation on the ability of carriers to enter local markets under the 
terms of section 251(c)(3) in order to ensure that section 251(c)(4) 
retains functional validity as a means to enter local phone markets.
    235. The principal distinction between sections 251(c)(3) and 
251(c)(4), in terms of the opportunities each section presents to new 
entrants, is that carriers using solely unbundled elements, compared 
with carriers purchasing services for resale, will have greater 
opportunities to offer services that are different from those offered 
by incumbents. More specifically, carriers reselling incumbent LEC 
services are limited to offering the same service an incumbent offers 
at retail. This means that resellers cannot offer services or products 
that incumbents do not offer. The only means by which a reseller can 
distinguish the services it offers from those of an incumbent is 
through price, billing services, marketing efforts, and to some extent, 
customer service. The ability of a reseller to differentiate its 
products based on price is limited, however, by the margin between the 
retail and wholesale price of the product.
    236. In contrast, a carrier offering services solely by recombining 
unbundled elements can offer services that differ from those offered by 
an incumbent. For example, some incumbent LECs have capabilities within 
their networks, such as the ability to offer Centrex, which they do not 
use to offer services to consumers. Carriers purchasing access to 
unbundled elements can offer such services. Additionally, carriers 
using unbundled elements can bundle services that incumbent LECs sell 
as distinct tariff offerings, as well as services that incumbent LECs 
have the capability to offer, but do not, and can market them as a 
bundle with a single price. The ability to package and market services 
in ways that differ from the incumbent's existing service offerings 
increases the requesting carrier's ability to compete against the 
incumbent and is likely to

[[Page 45515]]

benefit consumers. Additionally, carriers solely using unbundled 
network elements can offer exchange access services. These services, 
however, are not available for resale under section 251(c)(4) of the 
1996 Act.
    237. If a carrier taking unbundled elements may have greater 
competitive opportunities than carriers offering services available for 
resale, they also face greater risks. A carrier purchasing unbundled 
elements must pay for the cost of that facility, pursuant to the terms 
and conditions agreed to in negotiations or ordered by states in 
arbitrations. It thus faces the risk that end-user customers will not 
demand a sufficient number of services using that facility for the 
carrier to recoup its cost. (Many network elements can be used to 
provide a number of different services.) A carrier that resells an 
incumbent LEC's services does not face the same risk. This distinction 
in the risk borne by carriers entering local markets through resale as 
opposed to unbundled elements is likely to influence the entry 
strategies of various potential competitors. Some new entrants will be 
unable or unwilling to bear the financial risks of entry by means of 
unbundled elements and will choose to enter local markets under the 
terms of section 251(c)(4) irrespective of the fact that they can 
obtain access to unbundled elements without owning any of their own 
facilities. Moreover, some markets may never support new entry through 
the use of unbundled elements because new entrants seeking to offer 
services in such markets will be unable to stimulate sufficient demand 
to recoup their investment in unbundled elements. Accordingly, in these 
markets carriers will enter through the resale of incumbent LEC 
services, irrespective of the fact that they could enter exclusively 
through the use of unbundled elements.
    238. We are not persuaded by the argument set forth by Ameritech, 
NYNEX, and MFS that allowing carriers to use solely recombined network 
elements would eviscerate the joint marketing restriction in section 
271(e)(1). It is true that the terms of section 271(e) do not restrict 
joint marketing through the use of unbundled elements pursuant to 
section 251(c)(3). As discussed above, differences in opportunities and 
risk will cause some new entrants to consider entering local telephone 
markets through resale of incumbent LEC services, even if they could 
enter solely through the use of unbundled elements. Thus, we conclude 
that section 271(e)(1) will impose a meaningful limitation on joint 
marketing.
    239. We note, moreover, that the 1996 Act does not prohibit all 
forms of joint marketing. For example, it does not prohibit carriers 
who own local exchange facilities from jointly marketing local and 
interexchange service. Nor does it prohibit joint marketing by carriers 
who provide local exchange service through a combination of local 
facilities which they own or possess, and unbundled elements. Because 
the 1996 Act does not prohibit all forms of joint marketing, we see no 
principled basis for reading into section 271(e)(1) a further 
limitation on the ability of carriers to jointly market local and long 
distance services without concluding that this section prohibits all 
forms of joint marketing. In other words, we see no basis upon which we 
could conclude that section 271(e)(1) restricts joint marketing of long 
distance services, and local services provided solely through the use 
of unbundled network elements, without also concluding that the section 
restricts the ability of carriers to jointly market long distance 
services and local services that are provided through a combination of 
a carriers' own facilities and unbundled network elements. Moreover, we 
do not believe that we have the discretion to read into the 1996 Act a 
restriction on competition which is not required by the plain language 
of any of its sections.
    240. We also reject the argument advanced by BellSouth and 
Ameritech that allowing carriers to use solely unbundled elements to 
provide services available through resale would allow carriers to evade 
a possible prohibition, which is reserved to the discretion of the 
states, on the sale of certain services to certain categories of 
consumers. Under section 251(c)(4)(B) states are permitted to restrict 
resellers from offering certain services to certain consumers, in the 
same manner that states restrict incumbent LECs. For example, states 
that prohibit incumbent LECs from selling to business consumers 
residential services priced below cost have the ability to restrict 
resellers from selling such services to business consumers.
    241. We do not believe, however, that carriers using solely 
unbundled elements to provide local exchange services will be able to 
evade any potential restrictions states may impose under section 
251(c)(4)(B). In this section Congress granted the states the 
discretion to impose certain limited restrictions on the sale of 
services available for resale. It did not, however, grant states, in 
section 251(c)(3), the same discretion to impose similar restrictions 
on the use of unbundled elements. Accordingly, we are not persuaded 
that allowing carriers to use solely unbundled elements to provide 
services that incumbent LECs offer for resale would allow competing 
carriers to evade a possible marketing restriction that Congress 
intended to reserve to the discretion of the states.
    242. We agree with those commenters who argue that it would be 
administratively impossible to impose a requirement that carriers must 
own some of their own local exchange facilities in order to obtain 
access to unbundled elements, and they must use these facilities, in 
combination with unbundled elements, for the purpose of providing local 
services. We conclude that it would not be possible to identify the 
elements carriers must own without creating incentives to build 
inefficient network architectures that respond not to marketplace 
factors, but to regulation. We further conclude that such a requirement 
could delay possible innovation. These effects would diminish 
competition for local telephone services, and thus any local exchange 
facilities requirement would be inconsistent with the 1996 Act's goals 
of promoting competition. Moreover, if we imposed a facilities 
ownership requirement that attempted to avoid these competitive 
pitfalls, it would likely be so easy to meet it would ultimately be 
meaningless.
    243. We reject the argument that requiring carriers to own some 
local exchange facilities would promote competition for local exchange 
services, or that we should impose such a requirement for other policy 
reasons. To the contrary, we conclude that allowing carriers to use 
unbundled elements as they wish, subject only to the maintenance of the 
key elements of the access charge regime, described below at section 
VII, will lead to more efficient competition in local phone markets. If 
we were to limit access to unbundled network elements to those markets 
where carriers already own, or could efficiently build, some local 
exchange facilities, we would limit the ability of carriers to enter 
local markets under the pricing standard for unbundled elements to 
those markets that could efficiently support duplication of some or all 
of the incumbent LECs' networks. We believe that such a result could 
diminish competition, and that allowing new entrants to take full 
advantage of incumbent LECs' scale and scope economies will promote 
more rapid and efficient entry and will result in more robust 
competition.
    244. Finally, we conclude that a new entrant may offer services to 
one group of consumers using unbundled network elements, and it may 
offer services to a

[[Page 45516]]

separate group of consumers by reselling an incumbent LEC's services. 
With the exception noted in Section VII, infra, we do not address the 
issue of whether the 1996 Act permits a new entrant to offer services 
to the same set of consumers through a combination of unbundled 
elements and services available for resale.

I. Provision of Interexchange Services Through The Use of Unbundled 
Network Elements

1. Background
    245. In the NPRM, we tentatively concluded that interexchange 
carriers are telecommunications carriers, and thus such carriers are 
entitled to access to unbundled elements under the terms of section 
251(c)(3). We also tentatively concluded that carriers may request 
unbundled elements for purposes of originating and terminating toll 
services, in addition to any other services they seek to provide, 
because section 251(c)(3) provides that carriers may request unbundled 
elements to provide a ``telecommunications service,'' and interexchange 
services are a telecommunications service.
    246. In the NPRM, we sought comment on whether the 1996 Act permits 
carriers to use unbundled elements to provide exchange access services 
only, or whether carriers seeking to provide exchange access services 
using unbundled elements must provide local exchange service as well. 
We premised the latter view on the definition of the term ``network 
element,'' as a facility and not a service, and on the pricing standard 
under section 252(d)(1) that requires network elements to be priced 
based on economic costs (rather than jurisdictionally separated costs.) 
We also sought comment on whether allowing carriers to purchase 
unbundled elements to provide exchange access services exclusively 
would be inconsistent with the terms of sections 251(i) and 251(g) and, 
further, whether this would result in a fundamental jurisdictional 
shift of the administration of interstate access charges to state 
jurisdictions.
    247. Finally, in the NPRM, we tentatively concluded that, if 
carriers purchase unbundled elements to provide exchange access 
services to themselves, irrespective of whether they provide such 
services alone or in connection with local exchange services, incumbent 
LECs cannot assess Part 69 access charges in addition to charges for 
the cost of the unbundled elements. We based this tentative conclusion 
on the view that the imposition of access charges in addition to cost-
based charges for unbundled elements would depart from the statutory 
mandate of cost-based pricing of elements.
2. Discussion
    248. We confirm our tentative conclusion in the NPRM that section 
251(c)(3) permits interexchange carriers and all other requesting 
telecommunications carriers, to purchase unbundled elements for the 
purpose of offering exchange access services, or for the purpose of 
providing exchange access services to themselves in order to provide 
interexchange services to consumers. Although we conclude below that we 
have discretion under the 1934 Act, as amended by the 1996 Act, to 
adopt a limited, transitional plan to address public policy concerns 
raised by the bypass of access charges via unbundled elements, we 
believe that our interpretation of section 251(c)(3) in the NPRM is 
compelled by the plain language of the 1996 Act. As we observed in the 
NPRM, section 251(c)(3) provides that requesting telecommunications 
carriers may seek access to unbundled elements to provide a 
``telecommunications service,'' and exchange access and interexchange 
services are telecommunications services. Moreover, section 251(c)(3) 
does not impose restrictions on the ability of requesting carriers ``to 
combine such elements in order to provide such telecommunications 
service[s].'' Thus, we find that there is no statutory basis upon which 
we could reach a different conclusion for the long term.
    249. We also confirm our conclusion in the NPRM that, for the 
reasons discussed below in section V.J, carriers purchase rights to 
exclusive use of unbundled loop elements, and thus, as the Department 
of Justice and Sprint observe, such carriers, as a practical matter, 
will have to provide whatever services are requested by the customers 
to whom those loops are dedicated. This means, for example, that, if 
there is a single loop dedicated to the premises of a particular 
customer and that customer requests both local and long distance 
service, then any interexchange carrier purchasing access to that 
customer's loop will have to offer both local and long distance 
services. That is, interexchange carriers purchasing unbundled loops 
will most often not be able to provide solely interexchange services 
over those loops.
    250. We reject the argument advanced by a number of incumbent LECs 
that section 251(i) demonstrates that requesting carriers using 
unbundled elements must continue to pay access charges. Section 251(i) 
provides that nothing in section 251 ``shall be construed to limit or 
otherwise affect the Commission's authority under section 201.'' We 
conclude, however, that our authority to set rates for these services 
is not limited or affected by the ability of carriers to obtain 
unbundled elements for the purpose of providing interexchange services. 
Our authority to regulate interstate access charges remains unchanged 
by the 1996 Act. What has potentially changed is the volume of access 
services, in contrast to the number of unbundled elements, 
interexchange carriers are likely to demand and incumbent LECs are 
likely to provide. When interexchange carriers purchase unbundled 
elements from incumbents, they are not purchasing exchange access 
``services.'' They are purchasing a different product, and that product 
is the right to exclusive access or use of an entire element. Along 
this same line of reasoning, we reject the argument that our conclusion 
would place the administration of interstate access charges under the 
authority of the states. When states set prices for unbundled elements, 
they will be setting prices for a different product than ``interstate 
exchange access services.'' Our exchange access rules remain in effect 
and will still apply where incumbent LECs retain local customers and 
continue to offer exchange access services to interexchange carriers 
who do not purchase unbundled elements, and also where new entrants 
resell local service. The application of our exchange access rules in 
the circumstances described will continue beyond the transition period 
described at infra, Section VII.
    251. We also reject the incumbent LECs' arguments that language 
contained in bills that were not enacted, or legislative history 
connected to such bills, demonstrates that carriers cannot purchase 
access to unbundled elements to provide exchange access services to 
themselves, for the purpose of providing long distance services to 
consumers. The incumbent LECs are arguing in effect, that we should 
read into the current statute a limitation on the ability of carriers 
to use unbundled network elements, despite the fact that no such 
limitation survived the Conference Committee's amendments to the 1996 
Act. We conclude, however, that the language of section 251(c)(3), 
which provides that telecommunications carriers may purchase unbundled 
elements in order to provide a telecommunications service is not 
ambiguous. Accordingly, we must

[[Page 45517]]

interpret it pursuant to its plain meaning and not by referencing 
earlier versions of the statute that were ultimately not adopted by 
Congress.
    252. Moreover, we do not believe that the Joint Explanatory 
Statement, which describes the House and Senate versions of the 
statute, and the 1996 Act as enacted, compels a different conclusion. 
The Joint Explanatory Statement states that the statute incorporates 
provisions from the Senate Bill and the House Amendment in connection 
with the interconnection model adopted in section 251. It notes that 
the provision in the Senate Bill relating to interconnection did not 
apply to interconnection arrangements between local and long distance 
carriers for the purpose of providing long distance services. The text 
of section 251 of the Senate Bill is consistent with this comment 
because it states that a local exchange carrier must offer 
interconnection to other carriers to allow such carriers to provide 
telephone exchange or exchange access services. The Joint Explanatory 
Statement, however, does not describe any restriction in the House 
Amendment regarding the ability of carriers to use unbundled elements 
to provide long distance service. Indeed, the House Amendment 
specifically states that carriers may obtain access to unbundled 
elements to offer ``a telecommunications service,'' which is not 
limited to telephone exchange and exchange access services. We observe 
that the Conference Committee incorporated language from the House 
Amendment and not the Senate Bill in describing in section 251(c)(3) 
the services carriers may offer using unbundled elements. Accordingly, 
we do not believe that the Joint Explanatory Statement's description of 
the provision in the Senate Bill controls our interpretation of section 
251(c)(3) as enacted.
    253. We also reject the argument that allowing carriers to use 
unbundled elements to provide originating and terminating toll services 
is inconsistent with the purposes of the 1996 Act. Congress intended 
the 1996 Act to promote competition for not only telephone exchange 
services and exchange access services, but also for toll services. 
Section 251(b)(3), for example, imposes a duty on LECs to provide 
dialing parity for telephone toll service.
    254. We disagree with the incumbent LECs which argue that section 
251(g) requires requesting carriers using unbundled elements to 
continue to pay federal and state access charges indefinitely. Section 
251(g) provides that the federal and state equal access rules 
applicable before enactment, including the ``receipt of compensation,'' 
will continue to apply after enactment, ``until such restrictions and 
obligations are explicitly superseded by regulations prescribed by the 
Commission after such date of enactment.'' We believe this provision 
does not apply to the exchange access ``services'' requesting carriers 
may provide themselves or others after purchasing unbundled elements. 
Rather, the primary purpose of section 251(g) is to preserve the right 
of interexchange carriers to order and receive exchange access services 
if such carriers elect not to obtain exchange access through their own 
facilities or by means of unbundled elements purchased from an 
incumbent.
    255. We affirm our tentative conclusion in the NPRM that, 
telecommunications carriers purchasing unbundled network elements to 
provide interexchange services or exchange access services are not 
required to pay federal or state exchange access charges except as 
described in section VII, infra, for a temporary period. As we 
explained in the NPRM, if we were to require indefinitely carriers 
purchasing unbundled elements to also pay access charges, then 
incumbent LECs would receive compensation in excess of their underlying 
network costs. This result would be inconsistent with the pricing 
standard for unbundled elements set forth in section 252(d)(1). In 
addition, we believe this conclusion is consistent with Congress's 
overriding goal of promoting efficient competition for local telephony 
services, because it will allow, in the long term, new entrants using 
unbundled elements to compete on the basis of the economic costs 
underlying the incumbent LECs' networks. The facilities used to provide 
exchange access services are the same as those used to provide local 
exchange services. We note, however, as discussed below, (see infra, 
Section VII, discussing an interim mechanism addressing near-term 
access charge bypass) that certain additional charges are necessary for 
a specific, limited duration to smooth the transition to a competitive 
marketplace. We also note that where new entrants purchase access to 
unbundled network elements to provide exchange access services, whether 
or not they are also offering toll services through such elements, the 
new entrants may assess exchange access charges to IXCs originating or 
terminating toll calls on those elements. In these circumstances, 
incumbent LECs may not assess exchange access charges to such IXCs 
because the new entrants, rather than the incumbents, will be providing 
exchange access services, and to allow otherwise would permit incumbent 
LECs to receive compensation in excess of network costs in violation of 
the pricing standard in section 252(d). See 47 U.S.C. Sec. 252. We 
further note, however, that in these same circumstances the new entrant 
purchasing access to an unbundled switch element must pay to the 
incumbent LEC the charges included in the transitional mechanism, 
described infra, at Section VII, for a temporary period.
    256. We further conclude that when a carrier purchases a local loop 
for the purpose of providing interexchange services or exchange access 
services, incumbent LECs may not recover the subscriber line charge 
(SLC) now paid by end users. (As discussed at infra, Section VIII, a 
different result will occur when interconnecting carriers purchase LEC 
retail services at wholesale rates under section 251(c)(4).) The SLC 
recovers the portion of loop costs allocated to the interstate 
jurisdiction, but as discussed in Section II.C, supra, we conclude that 
the 1996 Act creates a new jurisdictional regime outside of the current 
separations process. The unbundled loop charges paid by new entrants 
under section 251(c)(3) will therefore recover the unseparated cost of 
the loop, including the interstate component now recovered through the 
SLC. If end users or carriers purchasing access to local loops were 
required to pay the SLC in this situation, LECs would enjoy double 
recovery, and the effective price of unbundled loops would exceed the 
cost-based levels required under section 251(d)(1).
    257. Finally, we have considered the economic impact on small 
incumbent LECs of our conclusion that carriers purchasing access to 
unbundled network elements to provide interexchange or exchange access 
services are not required to pay federal or state access charges, 
except as described in Section VII, infra, for a temporary period. For 
example, the Rural Telephone Coalition argues that rural ratepayers 
could be subject to higher local service rates if interexchange 
carriers are allowed to bypass access charges through the purchase of 
unbundled elements before proceedings regarding access reform and 
universal service are completed. We reject the Rural Telephone 
Coalition's argument, however, because our rules, as discussed in 
Section VII, infra, provide for a limited, transitional plan to address 
public policy concerns raised by the bypass of access charges through 
unbundled network elements.

[[Page 45518]]

J. Specific Unbundling Requirements

    258. Having interpreted the standards set forth in the 1996 Act for 
the unbundling of network elements, we now apply those standards to 
incumbent LECs' networks. Based on the information developed in this 
proceeding, we require incumbent LECs to provide unbundled access to 
local loops, network interface devices, end office and tandem 
switching, and various interoffice facilities, as described below. 
These network elements represent a minimum set of elements that must be 
unbundled by incumbent LECs. State commissions, as previously noted, 
are free to prescribe additional elements, and parties may agree on 
different or additional network elements in the voluntary negotiation 
process.
1. Local Loops
(a) Background
    259. In the NPRM, we tentatively concluded that incumbent LECs 
should be required to unbundle local loops. We sought comment on 
appropriate requirements for loop unbundling that would promote entry 
and build upon existing state initiatives, and whether we should adopt 
specific provisioning requirements for loop unbundling. We also sought 
comment on our tentative conclusion that incumbent LECs should make 
available as individual network elements various subloop elements such 
as the feeder, distribution, and concentration equipment.
(b) Discussion
    260. We conclude that incumbent LECs must provide local loops on an 
unbundled basis to requesting carriers. We note that the Joint 
Explanatory Statement lists local loops as an example of an unbundled 
network element. As discussed below, the record demonstrates that it is 
technically feasible for incumbent LECs to provide access to unbundled 
local loops, and that such access is critical to encouraging market 
entry. Further, the competitive checklist contained in section 271 
requires BOCs to offer unbundled loops separate from switching as a 
precondition to entry into the in-region, interLATA services market.
    261. Requiring incumbent LECs to make available unbundled local 
loops will facilitate market entry and improve consumer welfare. 
Without access to unbundled local loops, new entrants would need to 
invest immediately in duplicative facilities in order to compete for 
customers. Such investment and building would likely delay market entry 
and postpone the benefits of local telephone competition for consumers. 
Moreover, without access to unbundled loops, new entrants would be 
required to make a large initial sunk investment in loop facilities 
before they had a customer base large enough to justify such an 
expenditure. As of year end 1995, Class A carriers reported $268 
billion of total plant in service, of which $229 billion was classified 
as network plant. Local loop plant comprises approximately $109 billion 
of total plant in service, which represents 41 percent of total plant 
in service and 48 percent of network plant. See 1995 ARMIS Report 43-
04. This would increase the risk of entry and raise the new entrant's 
cost of capital. By contrast, the ability of a new entrant to purchase 
unbundled loops from the incumbent LEC allows the new entrant to build 
facilities gradually, and to deploy loops for its customers where it is 
efficient to do so. Moreover, in some areas, the most efficient means 
of providing competing service may be through the use of unbundled 
loops. In such cases, preventing access to unbundled loops would either 
discourage a potential competitor from entering the market in that 
area, thereby denying those consumers the benefits of competition, or 
cause the competitor to construct unnecessarily duplicative facilities, 
thereby misallocating societal resources.
    262. Section 251(c)(3) requires incumbent LECs to provide access to 
unbundled elements ``at any technically feasible point.'' The vast 
majority of commenters, including incumbent LECs, agree with our 
tentative conclusion that it is technically feasible to provide access 
to unbundled local loops, and a number of commenters identify the main 
distribution frame in a LEC central office as an appropriate access 
point. Moreover, access to unbundled loops is currently provided by 
several LECs pursuant to state unbundling requirements. Thus, we 
conclude that it is technically feasible for incumbent LECs to provide 
access to unbundled local loops at, for example, a central office 
distribution frame.
    263. We further conclude that the local loop element should be 
defined as a transmission facility between a distribution frame, or its 
equivalent, in an incumbent LEC central office, and the network 
interface device at the customer premises. This definition includes, 
for example, two-wire and four-wire analog voice-grade loops, and two-
wire and four-wire loops that are conditioned to transmit the digital 
signals needed to provide services such as ISDN, ADSL, HDSL, and DS1-
level signals. ISDN (Integrated Services Digital Network) at the Basic 
Rate Interface level permits the transmission of digital signals over 
the loop at the rate of 144 kbps, which provides two standard 64 kbps 
voice or data channels and a 16 kbps data channel. ISDN at the Primary 
Rate Interface permits 23 standard 64 kbps channels plus one 16 kbps 
data channel. ADSL (Asynchronous Digital Subscriber Line) is a 
transmission path that facilitates 6 Mbps digital signal downstream and 
640 kbps digital signal upstream, while simultaneously carrying an 
analog voice signal. Two-wire HDSL (High-bit-rate Digital Subscriber 
Line) permits the transmission of a 768 kbps digital signal over a 
copper loop, while four-wire HDSL allows the transmission of 1.544 Mbps 
over two two-wire pairs. We note that a number of parties proposed 
definitions of the local loop that encompassed some or all of these 
loop types. In addition, we agree with ITIC that the ability to offer 
various digital loop functions in competition with incumbent LECs may 
be particularly beneficial to small entities by allowing them to serve 
niche markets.
    264. Incumbent LECs are required to provide access to these 
transmission facilities only to the extent technically feasible. That 
is, if it is not technically feasible to condition a loop facility to 
support a particular functionality, the incumbent LEC need not provide 
unbundled access to that loop so conditioned. For example, a local loop 
that exceeds the maximum length allowable for the provision of a high-
bit rate digital service could not feasibly be conditioned for such 
service. Such loop conditioning may involve removing load coils or 
bridged taps that interfere with the transmission of digital signals. 
Such a situation may necessitate a request for subloop elements. 
Nevertheless, section 251(c)(3) does not limit the types of 
telecommunications services that competitors may provide over unbundled 
elements to those offered by the incumbent LEC.
    265. Our definition of loops will in some instances require the 
incumbent LEC to take affirmative steps to condition existing loop 
facilities to enable requesting carriers to provide services not 
currently provided over such facilities. For example, if a competitor 
seeks to provide a digital loop functionality, such as ADSL, and the 
loop is not currently conditioned to carry digital signals, but it is 
technically feasible to condition the facility, the incumbent LEC must 
condition the loop to permit the transmission of digital signals. Thus, 
we reject BellSouth's position that requesting carriers ``take the LEC 
networks as they find them''

[[Page 45519]]

with respect to unbundled network elements. As discussed above, some 
modification of incumbent LEC facilities, such as loop conditioning, is 
encompassed within the duty imposed by section 251(c)(3). The 
requesting carrier would, however, bear the cost of compensating the 
incumbent LEC for such conditioning.
    266. We further conclude that incumbent LECs must provide 
competitors with access to unbundled loops regardless of whether the 
incumbent LEC uses integrated digital loop carrier technology, or 
similar remote concentration devices, for the particular loop sought by 
the competitor. IDLC technology allows a carrier to aggregate and 
multiplex loop traffic at a remote concentration point and to deliver 
that multiplexed traffic directly into the switch without first 
demultiplexing the individual loops. If we did not require incumbent 
LECs to unbundle IDLC-delivered loops, end users served by such 
technologies would not have the same choice of competing providers as 
end users served by other loop types. Further, such an exception would 
encourage incumbent LECs to ``hide'' loops from competitors through the 
use of IDLC technology.
    267. We find that it is technically feasible to unbundle IDLC-
delivered loops. One way to unbundle an individual loop from an IDLC is 
to use a demultiplexer to separate the unbundled loop(s) prior to 
connecting the remaining loops to the switch. Commenters identify a 
number of other methods for separating out individual loops from IDLC 
facilities, including methods that do not require demultiplexing. 
Again, the costs associated with these mechanisms will be recovered 
from requesting carriers.
    268. We decline to define a loop element in functional terms, 
rather than in terms of the facility itself. Some parties advocate 
defining a loop element as merely a functional piece of a shared 
facility, similar to capacity purchased on a shared transport trunk. 
According to these parties, this definition would enable an IXC to 
purchase a loop element solely for purposes of providing interexchange 
service. While such a definition, based on the types of traffic 
provided over a facility, may allow for the separation of costs for a 
facility dedicated to one end user, we conclude that such treatment is 
inappropriate. Giving competing providers exclusive control over 
network facilities dedicated to particular end users provides such 
carriers the maximum flexibility to offer new services to such end 
users. In contrast, a definition of a loop element that allows 
simultaneous access to the loop facility would preclude the provision 
of certain services in favor of others. For example, carriers wishing 
to provide solely voice-grade service over a loop would preclude 
another carrier's provision of a digital service, such as ISDN or ADSL, 
over that same loop. Digital services such as ISDN and ADSL occupy the 
same frequency spectrum on a loop as ordinary voice-grade services. We 
note that these two types of services could be provided by different 
carriers over, for example, separate two-wire loop elements to the same 
end user.
    269. Incumbent LECs must provide cross-connect facilities, for 
example, between an unbundled loop and a requesting carrier's 
collocated equipment, in order to provide access to that loop. As we 
conclude in section IV.D, above, an incumbent LEC must take the steps 
necessary to allow a competitor to combine its own facilities with the 
incumbent LEC's unbundled network elements. We highlight this 
requirement for unbundled loops because of allegations by competitive 
providers that incumbent LECs have imposed unreasonable rates, terms, 
and conditions for such cross-connect facilities in the past. Incumbent 
LECs may recover the cost of providing such facilities in accordance 
with our rules on the costs of interconnection and unbundling. Charges 
for all such facilities must meet the cost-based standard provided in 
section 252(d)(1), and the terms and conditions of providing these 
facilities must be reasonable and nondiscriminatory under section 
251(c)(3).
    270. At this time, we decline to adopt additional terms and 
conditions, such as the five-minute loop cutover requirement proposed 
by MFS, for loop provisioning. We agree with commenters who contend 
that the provisioning of unbundled local loops must be subject to close 
scrutiny to ensure that incumbent LECs do not delay loop cutover or 
otherwise complicate the acquisition of loops by a competitor. We 
conclude, however, that the rules we adopt in the Access to Unbundled 
Network Elements section that require nondiscriminatory terms and 
conditions for provisioning, billing, testing, and repair of unbundled 
elements, and the availability of electronic ordering systems, 
adequately address these concerns. We will continue to review and 
revise our rules in this area as necessary.
    271. Section 251(d)(2)(A) requires the Commission to consider 
whether ``access to such network elements as are proprietary in nature 
is necessary.'' Most parties did not identify any proprietary concerns 
associated with providing unbundled access to local loops. Ericsson 
notes that some ``active'' loop equipment, such as channel banks and 
remote terminal equipment, is often proprietary in nature, and that 
manufacturers would require time to modify such equipment to create 
end-to-end network compatibility on a national basis. Ericsson does not 
contend, however, that any proprietary information would be revealed if 
loops using such equipment were unbundled, or that use of such 
equipment should prevent loop unbundling in general. Thus, we conclude 
that loop elements are, in general, not proprietary in nature under our 
interpretation of section 251(d)(2)(A). Even if loop elements were 
proprietary in nature, however, Ericsson does not meet the second 
consideration in our section 251(d)(2)(A) standard, which requires a 
showing that a new entrant can offer the proposed telecommunications 
service through the use of other, nonproprietary elements in the 
incumbent LEC's network. Ericsson merely contends that manufacturers 
may need time to establish compatibility between its proprietary 
equipment and equipment of other manufacturers. Therefore, we find that 
Ericsson's concerns do not justify withholding unbundled loops from 
requesting carriers pursuant to section 251(d)(2)(A).
    272. Section 251(d)(2)(B) directs the Commission to consider 
whether ``the failure to provide access to such network elements would 
impair the ability of the telecommunications carrier seeking access to 
provide the services that it seeks to offer.'' We have interpreted the 
term ``impair'' to mean either increased cost or decreased service 
quality that would result from using network elements of the incumbent 
LEC other than the one sought. Commenters do not identify alternative 
facilities that would fulfill requesting carriers' need for 
transmission between the central office and the customer premises at 
the same cost and same quality of service. Accordingly, we conclude 
that competitors' ability to provide telephone exchange, exchange 
access, or other telecommunications services would be significantly 
impaired if they did not have the opportunity to purchase unbundled 
loops from incumbent LECs.
    273. As a general matter, we believe that subloop unbundling could 
give competitors flexibility in deploying some portions of loop 
facilities, while relying on the incumbent LEC's facilities where 
convenient. For example, a competitor may seek to minimize its reliance 
on the LEC's

[[Page 45520]]

facilities by combining its own feeder plant with the incumbent LEC's 
distribution plant. In addition, some high bandwidth services, such as 
ADSL, cannot be provided over long loop lengths. ITIC, Compaq, and 
Intel assert that subloop unbundling would lead to innovative new data 
services. In these situations, carriers would need access at points 
along the loop closer to the customer premises. The record presents 
evidence primarily of logistical, rather than technical, impediments to 
subloop unbundling. Several LECs and USTA, for example, assert that 
incumbent LECs would need to create databases for identifying, 
provisioning, and billing for subloop elements. Further, incumbent LECs 
argue that there is insufficient space at certain possible subloop 
interconnection points. We note that these concerns do not represent 
``technical'' considerations under our interpretation of the term 
``technically feasible.''
    274. Nonetheless, we decline at this time to identify the feeder, 
feeder/distribution interface (FDI), and distribution components of the 
loop as individual network elements. We find that proponents of subloop 
unbundling do not address certain technical issues raised by incumbent 
LECs concerning subloop unbundling. Incumbent LECs contend that access 
by a competitor's personnel to loop equipment necessary to provide 
subloop elements, such as the FDI, raise network reliability concerns 
for customers served through that FDI. SBC, for example, asserts that 
access to its loop concentration points by competitors would increase 
the risk of error by a competitor's technicians that may disrupt 
service to customers of one or both carriers. U S West contends that 
the potential for poor technical implementation of subloop 
interconnection and the lack of overall responsibility for loop 
performance is very likely to degrade overall service quality. 
Proponents of subloop unbundling do not adequately respond to these 
arguments by incumbent LECs. As discussed above, we have determined 
that we must take into account specific, demonstrable claims regarding 
network reliability in determining whether to identify any particular 
component as an element that must be unbundled. Therefore, we believe 
that, at this stage, based on the current record evidence, the 
technical feasibility of subloop unbundling is best addressed at the 
state level on a case-by-case basis at this time. We encourage states 
to pursue subloop unbundling in response to requests for subloop 
elements by competing providers. Information developed by the parties 
in the context of a specific request for subloop unbundling will 
provide a useful framework for addressing the loop maintenance and 
network reliability matters that we have identified. Based on actions 
taken by the states or other future developments, and on the importance 
of subloop unbundling in light of technological advancements, we intend 
to revisit the specific issue of subloop unbundling sometime in 1997.
    275. We require incumbent LECs to offer unbundled access to the 
network interface device (NID), as a network element, as described 
below. The NID is a cross-connect device used to connect loop 
facilities to inside wiring. When a competitor deploys its own loops, 
the competitor must be able to connect its loops to customers' inside 
wiring in order to provide competing service, especially in multi-
tenant buildings. In many cases, inside wiring is connected to the 
incumbent LEC's loop plant at the NID. In order to provide service, a 
competitor must have access to this facility. Therefore, we conclude 
that a requesting carrier is entitled to connect its loops, via its own 
NID, to the incumbent LEC's NID.
    276. Pursuant to section 251(c)(3), we find that this arrangement 
clearly is technically feasible. Ameritech notes that it currently 
maintains such connections with competitors that have deployed their 
own loop facilities. This is persuasive evidence that unbundled access 
at the NID, in this manner, does not raise network reliability 
concerns. Under section 251(d)(2)(A), the record contains no evidence 
of proprietary concerns with unbundled access to the NID. In addition, 
under our interpretation of the ``impair'' test of section 
251(d)(2)(B), commenters do not contend that new entrants could obtain 
the same functionality at the same cost and service quality through 
other network elements of the incumbent LEC. Moreover, the record 
indicates that certain network architectures used by new entrants, such 
as fiber rings, can most efficiently connect end users to the new 
entrant's switching office without use of the incumbent LEC's 
facilities. Thus, we conclude that the unavailability of access to 
incumbent LECs' NIDs would impair the ability of carriers deploying 
their own loops to provide service. Further, we believe that unbundled 
access to the NID will facilitate entry strategies premised on the 
deployment of loops. As discussed in section VII, above, the new 
entrant bears the costs connecting its NID to the incumbent LEC's NID.
    277. We do not require an incumbent LEC to permit a new entrant to 
connect its loops directly to the incumbent LEC's NID. MCI contends 
that directly connecting its loops to incumbent LEC's NIDs is ``[t]he 
only practical solution'' for gaining access to inside wiring. 
According to MCI, there is no extra wiring to connect the incumbent 
LEC's NID to the new entrant's NID. Ameritech demonstrates, however, 
that it currently provides access to inside wiring through the type of 
arrangement that MCI asserts is not practical--that is, by connecting a 
new entrant's loops to inside wiring via the new entrant's NID and 
Ameritech's NID. MCI does not demonstrate that its ability to provide 
competing service is unreasonably limited by the arrangements explained 
by Ameritech.
    278. The record contains conflicting evidence on the technical 
feasibility of requiring incumbent LECs to permit competitors to 
connect their loops directly to incumbent LECs' NIDs. Ameritech asserts 
that such a direct connection would leave Ameritech's unused loops 
without overvoltage protection. MCI argues that overvoltage protection 
is provided through the incumbent LEC's ``protector module'' that is 
separate from the NID. Ameritech responds that its NIDs are integrated 
units providing both overvoltage protection and a demarcation point, 
and that these two functions of the NID are ``inseverable.'' AT&T 
contends direct access to incumbent LECs NIDs is technically feasible. 
According to AT&T, if a competitor connects its loops directly to the 
incumbent LEC's NID, the incumbent LEC's loops remain connected to the 
grounding equipment that protects against overvoltage. According to 
AT&T, when the competitor does not use spare terminals on the NID, the 
competitor would be required to ground the incumbent LEC's unused loops 
to protect against overvoltage.
    279. We find that the record in this proceeding does not permit a 
determination on the technical feasibility of the direct connection of 
a competitor's loops to the incumbent LEC's NID. Our requirement of a 
NID-to-NID connection addresses the most critical need of competitors 
that deploy their own loops--obtaining access to the inside wiring of 
the building. We recognize, however, that competitors may benefit by 
directly connecting their loops to the incumbent LEC's NID, for 
example, by avoiding the cost of deploying NIDs. States should 
determine whether direct connection to the NID can be achieved in a 
technically feasible manner in the context of

[[Page 45521]]

specific requests by competitors for direct access to incumbent LECs' 
NIDs.
2. Switching
(a) Background
    280. In the NPRM, we tentatively concluded that incumbent LECs 
should be required to make available local switching capability as an 
unbundled network element. We sought comment on how a local switching 
element should be defined, and we identified two possible models: the 
switch ``platform'' approach, which would entitle and require a 
requesting carrier to purchase all of the features and functions of the 
switch on a per-line basis and the port approach used by the New York 
Commission, which offers local switching capability through the 
purchase of a port at a retail rate. We also sought comment on other 
definitions of a local switching element. In addition, we requested 
that commenters address whether vertical switching functions, such as 
those enabling the provision of custom local area signaling service 
(CLASS) features and call waiting, should be considered individual 
network elements separate from the basic switching functionality.
(b) Discussion
(i) Local Switching
    281. We conclude that incumbent LECs must provide local switching 
as an unbundled network element. The record supports a finding that it 
is technically feasible for incumbent LECs to provide access to an 
unbundled local switching element, and that denying access to a local 
switching element would substantially impair the ability of many 
competing carriers to provide switched telecommunications services. We 
also note that section 271 requires BOCs to offer or provide ``[l]ocal 
switching unbundled from transport, local loop transmission, or other 
services'' as a precondition to providing in-region interLATA services. 
As discussed below, we identify a local switching element that includes 
the basic function of connecting lines and trunks as well as vertical 
switching features, such as custom calling and CLASS features. We agree 
with the Illinois Commission that defining the switching element in 
this way will permit competitors to compete more effectively by 
designing new packages and pricing plans.
    282. In the United States, there are over 23,000 central office 
switches, the vast majority of which are operated by incumbent LECs. It 
is unlikely that consumers would receive the benefits of competition 
quickly if new entrants were required to replicate even a small 
percentage of incumbent LECs' existing switches prior to entering the 
market. The Illinois Commission staff presented evidence in a recent 
proceeding indicating that it takes between nine months and two years 
for a carrier to purchase and install a switch. We find this to be 
persuasive evidence of the entry barrier that would be created if new 
entrants were unable to obtain unbundled local switching from the 
incumbent LEC. The ability to purchase unbundled switching will also 
promote competition in an area until the new entrant has built up a 
sufficient customer base to justify investing in its own switch. We 
expect that the availability of unbundled local switching is likely to 
increase the number of carriers that will successfully enter the 
market, and thus should accelerate the development of local 
competition.
    283. We define the local switching element to encompass line-side 
and trunk-side facilities plus the features, functions, and 
capabilities of the switch. The NPRM used the terms ``switch platform'' 
and ``port,'' as they had been developed by the Illinois and New York 
Commissions, respectively, to describe two possible approaches to 
establishing an unbundled local switching element. Parties commenting 
on the unbundled switching element attributed a variety of 
functionalities to each of these terms. To avoid confusion, we will not 
use these terms in discussing the unbundled local switching element. 
Instead, we will address commenters' proposals according to the 
functionality that they recommend be included in the definition of an 
unbundled local switching element. The line-side facilities include the 
connection between a loop termination at, for example, a main 
distribution frame (MDF), and a switch line card. Trunk-side facilities 
include the connection between, for example, trunk termination at a 
trunk-side cross-connect panel and a trunk card. The ``features, 
functions, and capabilities'' of the local switch include the basic 
switching function of connecting lines to lines, lines to trunks, 
trunks to lines, trunks to trunks. It also includes the same basic 
capabilities that are available to the incumbent LEC's customers, such 
as a telephone number, directory listing, dial tone, signaling, and 
access to 911, operator services, and directory assistance. Purchasing 
the local switching element does not entitle a requesting carrier to 
connect its own AIN call processing database to the incumbent LEC's 
switch, either directly or via the incumbent LEC's signal transfer 
point or database. Section V.I.4, which discusses the unbundling of 
incumbent LECs' signaling systems and databases. We also note that E911 
and operator services are further unbundled from local switching. In 
addition, the local switching element includes all vertical features 
that the switch is capable of providing, including custom calling, 
CLASS features, and Centrex, as well as any technically feasible 
customized routing functions. Thus, when a requesting carrier purchases 
the unbundled local switching element, it obtains all switching 
features in a single element on a per-line basis. A requesting carrier 
will deploy individual vertical features on its customers' lines by 
designating, via an electronic ordering interface, which features the 
incumbent LEC is to activate for particular customer lines.
    284. We disagree with commenters who argue that vertical switching 
features should be classified exclusively as retail services, available 
to competing providers only through the resale provision of section 
251(c)(4). The 1996 Act defines network element as ``a facility or 
equipment used in the provision of a telecommunications service'' and 
``the features, functions, and capabilities that are provided by means 
of such facility or equipment.'' Vertical switching features, such as 
call waiting, are provided through operation of hardware and software 
comprising the ``facility'' that is the switch, and thus are 
``features'' and ``functions'' of the switch. In some cases vertical 
features may be provided using hardware and software external to the 
actual switch. In those instances, the functionality of such external 
hardware and software is a separate element under section 251(c)(3), 
and is available to competing providers. We note that the Illinois 
Commission recently defined an unbundled local switching element to 
include vertical switching features. Although we find that vertical 
switching features should be available to competitors through the 
resale provision of section 251(c)(4), we reject the view that Congress 
intended for section 251(c)(4) implicitly to remove vertical switching 
features from the definition of ``network element.'' Therefore, we find 
that vertical switching features are part of the unbundled local 
switching element.
    285. At this time we decline to require further unbundling of the 
local switch into a basic switching element and independent vertical 
feature elements. Such unbundling does not appear to be necessary to 
promote local competition. Indeed, most potential local competitors do 
not recommend that vertical switching features be available as

[[Page 45522]]

separate network elements. MCI, AT&T and LDDS believe that such 
features should be available to new entrants as part of the local 
switch element. We also note that additional unbundling of the local 
switching would not result in a practical difference in the way the 
local switching element is provisioned. As discussed below, when a 
competing provider orders the unbundled basic switching element for a 
particular customer line, it will designate which vertical features 
should be activated by the incumbent LEC for that line. In addition, 
the record indicates that the incremental costs associated with 
vertical switching features on a per-line basis may be quite small, and 
may not justify the administrative difficulty for the incumbent LEC or 
the arbitrator to determine a price for each vertical element. Thus, 
states can investigate, in arbitration or other proceedings, whether 
vertical switching features should be made available as separate 
network elements. We will continue to review and revise our rules in 
this area as necessary.
    286. We conclude that providing access to an unbundled local 
switching element at a LEC central office is technically feasible. We 
are not persuaded by the argument that shared use of an unbundled 
switching element would jeopardize network security and reliability by 
permitting competitors independently to activate and deactivate various 
switching features. A competing provider will purchase and obtain the 
local switching element the same way it obtains an unbundled local 
loop, that is, by ordering, via electronic interfaces, the local 
switching element and particular vertical switching features. The 
incumbent LEC will receive the order and activate (or deactivate) the 
particular features on the customer line designated by the competing 
provider. Consequently, the incumbent LEC is not required to relinquish 
control over operations of the switch.
    287. We also reject the argument that a definition of local 
switching that incorporates shared use of a local switch would involve 
physical partitioning of the switch. The requirements we establish for 
local switch unbundling do not entail physical division of the switch, 
and consequently do not impose the inefficiency or technical 
difficulties identified by some commenters.
    288. Nor are we persuaded by the arguments of some incumbent LECs 
that an unbundled switching element based on shared use of the local 
switch is technically infeasible because incumbent LECs lack 
significant excess capacity at any given time. Initially, many requests 
for local switching elements from competitors will likely result from 
the loss of customers by the incumbent LEC. Thus, at least initially, 
an increase in the use of the local switch element by the requesting 
carrier is not likely to lead to an enormous, immediate increase in 
switch use overall. If incumbent LECs and competing providers believe 
that they would benefit by quantifying their anticipated demand for 
switch resources, they are free to do so in the negotiation and 
arbitration processes. Such planning may be necessary when a competitor 
anticipates that usage of the local switching element by its customers 
will place demands on the incumbent LEC's switch that exceed the usage 
levels anticipated by the incumbent LEC.
    289. We conclude that customized routing, which permits requesting 
carriers to designate the particular outgoing trunks that will carry 
certain classes of traffic originating from the competing provider's 
customers, is technically feasible in many LEC switches. Customized 
routing will enable a competitor to direct particular classes of calls 
to particular outgoing trunks, which will permit a new entrant to self-
provide, or select among other providers of, interoffice facilities, 
operator services, and directory assistance. In addition, we note that 
the Illinois Commission recently directed Ameritech and Centel to 
permit a carrier purchasing wholesale local exchange service to 
designate a provider of operator services and directory assistance 
other than that of the incumbent LEC. Such access is accomplished 
through the routing of such calls from the incumbent LEC's switch to 
the competing provider of the operator service or directory assistance. 
Bell Atlantic notes that customized routing is generally technically 
feasible for local calling, although it notes that the technology and 
capacity constraints vary from switch to switch. SBC contends that 
customized routing is technically infeasible for older switches, such 
as the 1AESS switch. AT&T acknowledges that, although the ability to 
establish customized routing in 1AESS switches may be affected by the 
``call load'' in each office, only 9.8% of the switches used by the 
seven RBOCs, GTE and SNET are 1AESS switches. We recognize that the 
ability of an incumbent LEC to provide customized routing to a 
requesting carrier will depend on the capability of the particular 
switch in question. Thus, our requirement that incumbent LECs provide 
customized routing as part of the ``functionality'' of the local 
switching element applies, by definition, only to those switches that 
are capable of performing customized routing. An incumbent LEC must 
prove to the state commission that customized routing in a particular 
switch is not technically feasible.
    290. Section 251(d)(2)(A) requires the Commission, in determining 
which network elements should be made available to competing providers, 
to consider ``whether access to such network elements as are 
proprietary in nature is necessary.'' To withhold a proposed network 
element from a competing provider, an incumbent LEC must demonstrate 
that the element is proprietary and that gaining access to that element 
is not necessary because the competing provider can use other, 
nonproprietary elements in the incumbent LEC's network to provide 
service. U S West asserts that switch unbundling could raise concerns 
involving, among other things, ``licensing of intellectual property.'' 
It cites a request by one interconnector to be the exclusive provider 
of particular features in U S West's generic switching software. Bell 
Atlantic states that it is not at liberty to sub-license the software 
that operates vertical switching features. We note, however, that these 
incumbent LECs do not object to providing vertical switching 
functionalities to requesting carriers under the resale provision of 
section 251(c)(4). In addition, the vast majority of parties that 
discuss unbundled local switching do not raise proprietary concerns 
with the unbundling of either basic local switching or vertical 
switching features. Even if we accept the claim of U S West and Bell 
Atlantic that vertical features are proprietary in nature, these 
carriers do not meet the second consideration in our section 
251(d)(2)(A) standard, which requires an incumbent LEC to show that a 
new entrant could offer the proposed telecommunications service through 
the use of other, nonproprietary elements in the incumbent LEC's 
network. Accordingly, we find that access to unbundled local switching 
is clearly ``necessary'' under our interpretation of section 
251(d)(2)(A).
    291. Section 251(d)(2)(B) directs the Commission to consider 
whether the failure to provide access to an unbundled element ``would 
impair the ability of the telecommunications carrier seeking access to 
provide the services that it seeks to offer.'' We have interpreted the 
term ``impair'' to mean either increased cost or decreased service 
quality that would result from using network elements of the incumbent 
LEC other than the one sought. SBC and MFS contend that

[[Page 45523]]

access to unbundled local switching may not be essential for new 
entrants because competitors are likely to deploy their own switches. 
These parties present no evidence that competitors could provide 
service using another element in the LEC's network at the same cost and 
at the same level of quality. In addition, most commenters that address 
this issue generally argue that local switching is essential for the 
provision of competing local service, and we agree. We thus conclude 
that a requesting carrier's ability to offer local exchange services 
would be impaired, if not thwarted, without access to an unbundled 
local switching element.
    292. Section 251(c)(3) requires that incumbent LECs provide access 
to unbundled network elements on terms and conditions that are ``just, 
reasonable, and nondiscriminatory.'' We agree with CompTel and LDDS 
that new entrants will be disadvantaged if customer switchover is not 
rapid and transparent. We also note that the Michigan Commission has 
recognized the significance of customer switchover intervals and has 
directed Ameritech and GTE to file proposals on how they will ``ensure 
the equal availability of expeditious processing of local, interLATA, 
and intraLATA carrier changes.'' Therefore, we require incumbent LECs 
to switch over customers for local service in the same interval as LECs 
currently switch end users between interexchange carriers. This 
requirement applies to switchovers that only require the incumbent LEC 
to make changes to software. Switchovers that require the incumbent LEC 
to make physical modifications to its network, such as connecting a 
competitor's loop to its switch, are not subject to this requirement, 
and instead are governed by our terms and conditions for all unbundled 
elements. Today, incumbent LECs routinely change customers' 
presubscribed interexchange carriers quickly and transparently, thereby 
contributing to the competitiveness of the interexchange market. We 
expect that a similar requirement for local exchange switchovers that 
require only a software change will similarly contribute to local 
exchange competition.
    293. We reject the proposal by some incumbent LECs to define 
unbundled local switching as the facilities that provide a point of 
access to the switch, but that would not actually include switching 
functionality. Under this definition, the purchaser of the local 
switching element would not actually obtain local switching, only the 
right to purchase local switching functionality and other switching 
features at wholesale rates. We believe that the unbundled local 
switching element must include the functionality of connecting lines 
and trunks. The definition proposed by these incumbent LECs would 
contravene the requirement in section 251(c)(3) that incumbent LECs 
provide network elements ``in a manner that allows requesting carriers 
to combine such elements in order to provide such telecommunications 
service.'' If a competing provider combined its own loops and transport 
with the local switching element (``point of access''), it would be 
unable to provide telecommunications service without separately 
purchasing, at wholesale rates, switching functionality from the 
incumbent LEC.
    294. We also disagree with the proposal to define local switching 
as a point of access plus basic switching functionality, but that would 
exclude vertical switching features. As a legal matter, this definition 
is inconsistent with the 1996 Act's definition of ``network element,'' 
which includes all the ``features, functionalities, and capabilities 
provided by means of such facility or equipment.'' In addition, this 
definition would not fulfill the pro-competitive objectives of the 1996 
Act as effectively as the per-line definition we adopt. A competitor 
that obtains basic and vertical switching features at cost-based rates 
will have maximum flexibility to distinguish its offerings from those 
of the incumbent LEC by developing a variety of service packages and 
pricing plans. Moreover, an upfront purchase of all local switching 
features may speed entry by simplifying practical issues such as the 
pricing of individual switching features.
    295. We also address the impact on small incumbent LECs. For 
example, the Illinois Independent Telephone Association and the Rural 
Telephone Coalition favor rules that recognize the differences between 
larger and smaller LECs. We have considered the economic impact of our 
rules in this section on small incumbent LECs. In this section, for 
example, we expressly provide for the fact that certain LECs may 
possess switches that are incapable of performing customized routing 
for competitors that purchase unbundled local switching. As noted by 
Rural Telephone Coalition and the Illinois Independent Telephone 
Coalition, this approach is necessary to accommodate the different 
technical capabilities of large and small carriers. We also note that 
section 251(f) of the 1996 Act provides relief for certain small LECs 
from our regulations under section 251.
(ii) Tandem Switching
    296. We also affirm our tentative conclusion in the NPRM that it is 
technically feasible for incumbent LECs to provide access to their 
tandem switches unbundled from interoffice transmission facilities. We 
note that some states already have required incumbent LECs to unbundle 
tandem switching. Parties do not contend, pursuant to section 
251(d)(2)(A), that tandem switches are proprietary in nature. With 
regard to section 251(d)(2)(B), we find that competitors' ability to 
provide telecommunications service would be impaired without unbundled 
access to tandem switching. Therefore, we find that the availability of 
unbundled tandem switching will ensure that competitors can deploy 
their own interoffice facilities and connect them to incumbent LECs' 
tandem switches where it is efficient to do so.
    297. We define the tandem switch element as including the 
facilities connecting the trunk distribution frames to the switch, and 
all the functions of the switch itself, including those facilities that 
establish a temporary transmission path between two other switches. The 
definition of the tandem switching element also includes the functions 
that are centralized in tandems rather than in separate end office 
switches, such as call recording, the routing of calls to operator 
services, and signaling conversion functions.
(iii) Packet Switching
    298. At this time, we decline to find, as requested by AT&T and 
MCI, that incumbent LECs' packet switches should be identified as 
network elements. Because so few parties commented on the packet 
switches in connection with section 251(c)(3), the record is 
insufficient for us to decide whether packet switches should be defined 
as a separate network element. We will continue to review and revise 
our rules, but at present, we do not adopt a national rule for the 
unbundling of packet switches.
3. Interoffice Transmission Facilities
(a) Background
    299. In the NPRM, we proposed to require incumbent LECs to make 
available unbundled transport facilities in a manner that corresponds 
to the rate structure for interstate transport charges. We specifically 
proposed to require unbundled access to links between the end office 
and the serving wire center (SWC), the SWC and the IXC point of 
presence (POP), the end office and the tandem switch, and the tandem 
switch and the SWC. We also tentatively

[[Page 45524]]

concluded that incumbent LECs should be required to unbundle channel 
termination facilities for special access from the interoffice 
facilities. In addition, we requested comment on whether and how other 
interoffice facilities used by incumbent LECs should be unbundled.
(b) Discussion
    300. We conclude that incumbent LECs must provide interoffice 
transmission facilities on an unbundled basis to requesting carriers. 
The record supports our conclusion that such access is technically 
feasible and would promote competition in the local exchange market. We 
note that the 1996 Act requires BOCs to unbundle transport facilities 
prior to entering the in-region, interLATA market.
    301. We require incumbent LECs to provide unbundled access to 
shared transmission facilities between end offices and the tandem 
switch. Further, incumbent LECs must provide unbundled access to 
dedicated transmission facilities between LEC central offices or 
between such offices and those of competing carriers. This includes, at 
a minimum, interoffice facilities between end offices and serving wire 
centers (SWCs), SWCs and IXC POPs, tandem switches and SWCs, end 
offices or tandems of the incumbent LEC, and the wire centers of 
incumbent LECs and requesting carriers. The incumbent LEC must also 
provide, to the extent discussed below, all technically feasible 
transmission capabilities, such as DS1, DS3, and Optical Carrier levels 
(e.g. OC-3/12/48/96) that the competing provider could use to provide 
telecommunications services. We conclude that an incumbent LEC may not 
limit the facilities to which such interoffice facilities are 
connected, provided such interconnection is technically feasible, or 
the use of such facilities. In general, this means that incumbent LECs 
must provide interoffice facilities between wire centers owned by 
incumbent LECs or requesting carriers, or between switches owned by 
incumbent LECs or requesting carriers. For example, an interoffice 
facility could be used by a competitor to connect to the incumbent 
LEC's switch or to the competitor's collocated equipment. We agree with 
the Texas Commission that a competitor should have the ability to use 
interoffice transmission facilities to connect loops directly to its 
switch. We anticipate that these requirements will reduce entry 
barriers into the local exchange market by enabling new entrants to 
establish efficient local networks by combining their own interoffice 
facilities with those of the incumbent LEC.
    302. The ability of new entrants to purchase the interoffice 
facilities we have identified will increase the speed with which 
competitors enter the market. By unbundling various dedicated and 
shared interoffice facilities, a new entrant can purchase all 
interoffice facilities on an unbundled basis as part of a competing 
local network, or it can combine its own interoffice facilities with 
those of the incumbent LEC. The opportunity to purchase unbundled 
interoffice facilities will decrease the cost of entry compared to the 
much higher cost that would be incurred by an entrant that had to 
construct all of its own facilities. An efficient new entrant might not 
be able to compete if it were required to build interoffice facilities 
where it would be more efficient to use the incumbent LEC's facilities. 
We recognize that there are alternative suppliers of interoffice 
facilities in certain areas. We are convinced, however, that entry will 
be facilitated if competitors have greater, not fewer, options for 
procuring interoffice facilities as part of their local networks, and 
that Congress intended for competitors to have these options available 
from competitors. Thus, the rules we establish for the unbundled 
interoffice facilities should maximize a competitor's flexibility to 
use new technologies in combination with existing LEC facilities.
    303. We find that it is technically feasible for incumbent LECs to 
unbundle the foregoing interoffice facilities as individual network 
elements. The interconnection and unbundling arrangements among the 
larger LECs, IXCs, and CAPs that resulted from our Expanded 
Interconnection rules confirm the technical feasibility of unbundling 
interoffice facilities used by incumbent LECs to provide special access 
and switched transport. As AT&T and Telecommunications Resellers 
Association point out, IXCs currently interconnect with incumbent LECs' 
transport facilities pursuant to standard specifications. We also note 
that commenters do not identify technical feasibility problems with 
unbundling interoffice facilities.
    304. We also find that it is technically feasible for incumbent 
LECs to unbundle certain interoffice facilities not addressed in our 
Expanded Interconnection proceeding. First, we conclude that an 
incumbent LEC must provide unbundled access to interoffice facilities 
between its end offices, and between any of its switching offices and a 
new entrant's switching office, where such interoffice facilities 
exist. This allows a new entrant to purchase unbundled facilities 
between two end offices of the incumbent LEC, or between the new 
entrant's switching office and the incumbent LEC's switching office. 
Although our Expanded Interconnection rules did not specifically 
require incumbent LECs to unbundle these facilities, commenters do not 
identify any potential technical problem with such unbundling. 
Moreover, some LECs already offer unbundled dedicated interoffice 
facilities, for example, between their end offices and SWCs for 
exchange access.
    305. In addition, as a condition of offering unbundled interoffice 
facilities, we require incumbent LECs to provide requesting carriers 
with access to digital cross-connect system (DCS) functionality. A DCS 
aggregates and disaggregates high-speed traffic carried between IXCs' 
POPs and incumbent LECs' switching offices, thereby facilitating the 
use of cost-efficient, high-speed interoffice facilities. AT&T notes 
that the BOCs, GTE, and other large LECs currently make DCS 
capabilities available for the termination of interexchange traffic. We 
find that the use of DCS functionality could facilitate competitors' 
deployment of high-speed interoffice facilities between their own 
networks and LECs' switching offices. Therefore, we require incumbent 
LECs to offer DCS capabilities in the same manner that they offer such 
capabilities to IXCs that purchase transport services.
    306. We disagree with PacTel's assertion that it is not technically 
feasible for incumbent LECs to provide DCS functionality to competitors 
that purchase unbundled interoffice facilities. First, contrary to 
PacTel's assertion, we do not require incumbent LECs to develop new 
arrangements for the offering of DCS capabilities to competitors. We 
only require that DCS capabilities be made available to competitors to 
the extent incumbent LECs offer such capabilities to IXCs. Second, 
PacTel suggests the provision of DCS capabilities requires physical 
partitioning of the DCS equipment in order to prevent carriers from 
gaining control of each other's traffic. We do not require such 
partitioning for the provision of DCS capabilities. As noted above, we 
only require incumbent LECs to permit competitors to use DCS 
functionality in the same manner that incumbent LECs now permit IXCs to 
use such functionality.
    307. Section 251(d)(2)(A) requires the Commission to consider 
whether ``access to such network elements as are

[[Page 45525]]

proprietary in nature is necessary.'' Commenters do not identify any 
proprietary concerns relating to the provision of interoffice 
facilities that LECs are required to unbundle. We also note that many 
of these facilities are also currently offered on an unbundled basis to 
competing carriers. Therefore, the record provides no basis for 
withholding these facilities from competitors based on proprietary 
considerations.
    308. Section 251(d)(2)(B) requires the Commission to consider 
whether the failure to provide access to an unbundled element ``would 
impair the ability of the telecommunications carrier seeking access to 
provide the services that it seeks to offer.'' We have interpreted the 
term ``impair'' to mean either increased cost or decreased service 
quality that would result from using network elements other than the 
one sought. Certain commenters contend that unbundled access to these 
facilities would improve their ability to provide competitive local 
exchange and exchange access service. MCI, for example, argues that its 
inability to obtain unbundled access to trunks between an incumbent 
LEC's end offices raises its cost of providing local service. 
Accordingly, we conclude that the section 251(d)(2)(B) requires 
incumbent LECs to provide access to shared interoffice facilities and 
dedicated interoffice facilities between the above-identified points in 
incumbent LECs' networks, including facilities between incumbent LECs' 
end offices, new entrant's switching offices and LEC switching offices, 
and DCSs. We believe that access to these interoffice facilities will 
improve competitors' ability to design efficient network architecture, 
and in particular, to combine their own switching functionality with 
the incumbent LEC's unbundled loops.
    309. We reject Cincinnati Bell's argument that existing tariffs for 
transport and special access services filed pursuant to our Expanded 
Interconnection rules fulfill our obligation to implement the 
requirements of section 251(c). First, the Expanded Interconnection 
rules require the unbundling of interstate transport services only by 
Class A carriers whereas section 251(c) requires network unbundling by 
all incumbent LECs, except for carriers that are exempt under section 
251(f) from our interconnection rules. Consequently, some non-Class A 
carriers that were not subject to our Expanded Interconnection 
requirements will be required to comply with the requirements of this 
Order. Second, we find that the Class A carriers' existing tariffs for 
unbundled transport elements do not satisfy the unbundling requirement 
of section 251(c), as suggested by Cincinnati Bell, because such 
tariffs are only for interstate access services, not for unbundled 
interoffice facilities. As such, existing federal tariffs for transport 
and special access exclude intrastate transport, and therefore are not 
equivalent to unbundled interoffice facilities, which we have 
determined to be nonjurisdicational in nature.
    310. We also disagree with MECA, GTE, and Ameritech that we should 
consider ``pricing distortions'' in adopting rules for unbundled 
interoffice facilities. Section, below, addresses the pricing of 
unbundled network elements identified pursuant to section 251(c)(3) as 
it relates to our current access charge rules. Nor are we are persuaded 
by MECA's argument that incumbent LECs not subject to the MFJ should 
not be required to unbundle transport facilities because, according to 
MECA, such facilities are unnecessary for local competition. As 
discussed above, the ability of a new entrant to obtain unbundled 
access to incumbent LECs' interoffice facilities, including those 
facilities that carry interLATA traffic, is essential to that 
competitor's ability to provide competing telephone service.
    311. We do not impose specific terms and conditions for the 
provision of unbundled interoffice facilities. We believe that the 
rules we establish in this Order for all unbundled network elements 
adequately address ALTS's concern regarding the provisioning, billing, 
and maintenance of unbundled transport facilities. We also decline at 
this time to address the unbundling of incumbent LECs' ``dark fiber.'' 
Parties that address this issue do not provide us with information on 
whether dark fiber qualifies as a network element under sections 
251(c)(3) and 251(d)(2). Therefore, we lack a sufficient record on 
which to decide this issue. We will continue to review and revise our 
rules in this area as necessary.
    312. Rural Telephone Coalition contends that incumbent LECs should 
not be required to construct new facilities to accommodate new 
entrants. We have considered the economic impact of our rules in this 
section on small incumbent LECs. In this section, for example, we 
expressly limit the provision of unbundled interoffice facilities to 
existing incumbent LEC facilities. We also note that section 251(f) of 
the 1996 Act provides relief for certain small LECs from our 
regulations under section 251.
4. Databases and Signaling Systems
a. Background
(1) NPRM
    313. In the NPRM, we tentatively concluded that incumbent LECs 
should be required to unbundle access to their signaling systems and 
databases as network elements. We asked commenters to identify points 
at which carriers interconnect with SS7 networks today, as well as the 
technical feasibility of establishing other points of access and 
interconnection. We also asked commenters to identify those signaling 
and database functions currently provided by incumbent LECs on an 
unbundled basis, and other functions not currently offered by incumbent 
LECs, that the parties believe should be offered on an unbundled basis.
    314. In the NPRM, we noted the possibility that competitors that 
provide local exchange service using resold incumbent LEC services or 
unbundled elements might want to connect an alternative call processing 
database to the incumbent LEC's SS7 network in order to offer services 
and features not available through the incumbent LEC's own SS7 network 
databases.
    315. We also sought comment on unbundling access to the Advanced 
Intelligent Network (AIN), and referenced our separate Intelligent 
Networks proceeding which deals with related issues. We sought comment 
on whether to unbundle access to AIN facilities and functionalities.
(2) SS7 Signaling Network Technology
    316. Signaling systems facilitate the routing of telephone calls 
between switches. Most LECs employ signaling networks that are 
physically separate from their voice networks, and these ``out-of-
band'' signaling networks simultaneously carry signaling messages for 
multiple calls. In general, most LECs' signaling networks adhere to a 
Bellcore standard Signaling System 7 (SS7) protocol.
    317. SS7 networks use signaling links to transmit routing messages 
between switches, and between switches and call-related databases. A 
typical SS7 network includes a signaling link, which transmits 
signaling information in packets, from a local switch to a signaling 
transfer point (STP), which is a high-capacity packet switch. The STP 
switches packets onto other links according to the address information 
contained in the packet. These additional links extend to other 
switches, databases, and STPs in the LEC's network. A switch routing a 
call to another switch will initiate a series of signaling messages via 
signaling links

[[Page 45526]]

through an STP to establish a call path on the voice network between 
the switches.
    318. As mentioned above, the SS7 network also employs signaling 
links (via STPs) between switches and call-related databases, such as 
the Line Information Database (LIDB), Toll Free Calling (i.e., 800, 888 
number) database, and AIN databases. These links enable a switch to 
send queries via the SS7 network to call-related databases, which 
return customer information or instructions for call routing to the 
switch.
    319. From the perspective of a switch in a LEC network, the 
databases discussed above merely supply information or instructions. 
Updating or populating the information in such databases, however, 
takes place through a separate process involving different equipment. 
Carriers input information directly into a service management system 
(SMS), which in turn downloads such information into the individual 
databases.
    320. The Advanced Intelligent Network (AIN) is a network 
architecture that uses distributed intelligence in centralized 
databases to control call processing and manage network information, 
rather than performing those functions at every switch. An AIN-capable 
switch halts call progress when a resident software ``trigger'' is 
activated, and uses the SS7 network to access intelligent databases, 
known as Service Control Points (SCPs), that contain service software 
and subscriber information, for instruction on how to route, monitor, 
or terminate the call. AIN is being used in the deployment of number 
portability, wireless roaming, and such advanced services as same 
number service (i.e., 500 number service) and voice recognition 
dialing. AIN services are designed and tested in an off-line computer 
known as a Service Creation Environment (SCE). Once a service is 
successfully tested, the software is transferred to an SMS that 
administers and supports SCP databases in the network. The SMS then 
regularly downloads software and information to an SCP where 
interaction with the voice network takes place via the signaling links 
and STPs discussed above.
b. Discussion
    321. In the interconnection section above, we conclude that the 
exchange of signaling information between LECs necessary to exchange 
traffic and access call related databases was included within the 
interconnection obligation of section 251(c)(2). We emphasize below, 
such exchange of signaling information does not include the exchange of 
AIN signaling information between networks for the purpose of providing 
AIN messages to the incumbent LEC's switch from a competitor's SCP 
database. Thus, notwithstanding any obligations under section 
251(c)(3), incumbent LECs are required to accept and provide signaling 
in accordance with the exchange of traffic between interconnecting 
networks. We conclude that this exchange of signaling information may 
occur through an STP-to-STP interconnection.
(1) Signaling Links and STP
    322. We conclude that incumbent LECs, upon request, must provide 
nondiscriminatory access to their signaling links and STPs on an 
unbundled basis. We believe it is technically feasible for incumbent 
LECs to provide such access, and that such access is critical to entry 
in the local exchange market. Further, the 1996 Act requires BOCs to 
provide ``nondiscriminatory access to databases and associated 
signaling necessary for call routing and completion'' as a precondition 
for entry into in-region interLATA services. Thus, it appears that 
Congress contemplated the unbundling of signaling systems as network 
elements.
    323. We conclude that access to unbundled signaling links and STPs 
is technically feasible. The majority of commenters, including 
incumbent LECs, agree that it is technically feasible to provide 
unbundled access to signaling links and STPs. Parties note that 
incumbent LECs and signaling aggregators already provide such access. 
In addition, several state commissions already require incumbent LECs 
to provide unbundled elements of SS7 networks. Because of the screening 
role played by the STP and associated network reliability concerns that 
were raised in the record, however, we do not require that incumbent 
LECs permit requesting carriers to link their own STPs directly to the 
incumbent's switch or call-related databases. We take a deliberately 
conservative approach here because of significant evidence in the 
record and we note that mere conclusory objections to technical 
feasibility would not alone be sufficient evidence.
    324. Under section 251(d)(2)(A), the Commission must consider 
whether access to proprietary network elements is necessary. Commenters 
did not identify proprietary concerns with signaling protocols for the 
SS7 network. Moreover, in general, SS7 signaling networks adhere to 
Bellcore standards, rather then LEC-specific protocols and provide 
seamless interconnectivity between networks. Thus, we conclude that the 
unbundling of signaling links and STPs does not present proprietary 
concerns with respect to the incumbent LEC.
    325. Under section 251(d)(2)(B), the Commission must consider 
whether ``the failure to provide access to such network elements would 
impair the ability of the telecommunications carrier seeking access to 
provide the services that it seeks to offer.'' Access to signaling 
systems continues to be a critical element to providing competing local 
exchange and exchange access service. The vast majority of calls made 
over incumbent LEC networks are set-up and controlled by separate 
signaling networks. Incumbent LECs argue that access to signaling 
systems and associated databases is already available from other 
providers and therefore, they should not have to unbundle them for 
access by competitors. As discussed above, section 251(d)(2)(B) only 
relieves an incumbent LEC of its unbundling obligation if other 
unbundled elements in its network could provide the same service 
without diminution of quality. Because alternative signaling methods, 
such as in-band signaling, would provide a lower quality of service, we 
conclude that a competitor's ability to provide service would be 
significantly impaired if it did not have access to incumbent LECs' 
unbundled signaling links and STPs.
    326. The purchase of unbundled elements of the SS7 network gives 
the competitive provider the right to use those elements for signaling 
between its switches (including unbundled switching elements), between 
its switches and the incumbent LEC's switches, and between its switches 
and those third party networks with which the incumbent LEC's SS7 
network is interconnected. When a competitive provider purchases 
unbundled switching from the incumbent LEC, the incumbent LEC must 
provide nondiscriminatory access to its SS7 network from that switch in 
the same manner in which it obtains such access itself. Carriers that 
provide their own switching facilities should be able to access the 
incumbent LEC's SS7 network for each of their switches via a signaling 
link between their switch and an incumbent LEC's STP. Competitive 
carriers should be able to make this connection in the same manner as 
an incumbent LEC connects one of its own switches to the STP. This 
could be accomplished by the incumbent providing an unbundled signaling 
link from its STP to the competitor's switch or by a competitor 
bringing a signaling

[[Page 45527]]

link from its switch to the incumbent LEC's STP.
(2) Call-Related Databases
    327. We conclude that incumbent LECs, upon request, must provide 
nondiscriminatory access on an unbundled basis to their call-related 
databases for the purpose of switch query and database response through 
the SS7 network. Query and response access to a call-related database 
is intended to require the incumbent LEC only to provide access to its 
call-related databases as is necessary to permit a competing provider's 
switch (including the use of unbundled switching) to access the call-
related database functions supported by that database. The incumbent 
LEC may mediate or restrict access to that necessary for the competing 
provider to provide such services as are supported by the database. 
Thus, for example, we find that it is technically feasible for 
incumbent LECs to provide access to the Line Information Database 
(LIDB), the Toll Free Calling Database and Number Portability 
downstream databases. The vast majority of parties, including incumbent 
LECs, agree that it is technically feasible to provide access to the 
LIDB and the Toll Free Calling databases at an STP linked to the 
database. Several state commissions also report that they have ordered 
incumbent LECs' to provide such access to the LIDB and the Toll Free 
Calling databases. We require incumbent LECs to provide this access to 
their call-related databases by means of physical access at the STP 
linked to the unbundled database. We find that such access is critical 
to entry in the local exchange market.
    328. We conclude that it is not technically feasible to unbundle 
the SCP from its associated STP. We note that the overwhelming majority 
of commenters contend that it is not technically feasible to access 
call-related databases in a manner other than by connection at the STP 
directly linked to the call-related database. Parties argue that the 
STP is designed to provide mediation and screening functions for the 
SS7 network that are not performed at the switch or database. We, 
therefore, emphasize that access to call-related databases must be 
provided through interconnection at the STP and that we do not require 
direct access to call-related databases.
    329. Several commenters also identified access to call-related 
databases used in the incumbent's AIN to be critical to fair 
competition in the local market, and some state commissions have 
ordered incumbent LECs to provide access to AIN databases. We conclude 
that such access is technically feasible via an STP for those call-
related databases used in the incumbent LEC's AIN. First, of course, 
when a new entrant purchases an incumbent's local switching element it 
is technically feasible for the new entrant to use the incumbent's SCP 
element in the same manner, and via the same signaling links, as the 
incumbent itself. Thus, we find no technical impediments in the record 
with regard to such access when a requesting carrier is also purchasing 
a local switching element associated with the AIN call-related 
database.
    330. Further, we conclude that when a new entrant deploys its own 
switch, and links it to the incumbent LEC's signaling system, it is 
technically feasible for the incumbent to provide access to the 
incumbent's SCP to provide AIN-supported services to customers served 
by the new entrant's switch. Some SS7 network services resellers 
currently provide such access. Other potential local competitors 
present additional evidence supporting the technical feasibility of 
such access. Unlike the situation where a competitor's SCP would 
control the incumbent's switch (which is discussed below in section 
V.I.4.c.(4)), in this scenario, the incumbent's SCP will respond to and 
control the competitor's switch, and potential competitors that have 
commented in the record do not express network reliability concerns 
with regard to such control. Further, like the software resident in a 
switch, the incumbent LEC's applications resident in an SCP are merely 
part of the overall software and hardware making up the SCP facility. 
Thus, carriers purchasing access under either scenario above may use 
the incumbent's service applications in addition to their own.
    311. Although we conclude that access to incumbent AIN SCPs is 
technically feasible, we agree with BellSouth that such access may 
present the need for mediation mechanisms to, among other things, 
protect data in incumbent AIN SCPs and ensure against excessive traffic 
volumes. In addition, there may be mediation issues a competing carrier 
will need to address before requesting such access. Mediation may be 
necessary for requesting carriers to ensure that inadvertent feature 
interactions, network management control and customer privacy concerns 
do not arise from such access. Accordingly, if parties are unable to 
agree to appropriate mediation mechanisms through negotiations, we 
conclude that during arbitration of such issues the states (or the 
Commission acting pursuant to section 252(e)(5)) must consider whether 
such mediation mechanisms will be available and will adequately protect 
against intentional or unintentional misuse of the incumbent's AIN 
facilities. We encourage incumbent LECs and competitive carriers to 
participate in industry fora and industry testing to resolve 
outstanding mediation concerns. Incumbent LECs may establish reasonable 
certification and testing programs for carriers proposing to access AIN 
call related databases in a manner similar to those used for SS7 
certification.
    332. We recognize that providing unbundled access to AIN call-
related databases at cost, and in particular providing access to the 
incumbent LEC's software applications that reside in the AIN databases, 
may reduce the incumbent's incentive to develop new and advanced 
services using AIN. In the near term, however, requiring entrants to 
bear the cost of deploying a fully redundant network architecture, 
including AIN databases and their application software, would 
constitute a significant barrier to market entry for competitive 
carriers. As local service markets develop, however, competition may 
reduce the incumbent LEC's control over bottleneck facilities and 
increase the importance of innovation. In those circumstances it is 
important that incumbent LECs have the incentive to develop unique and 
innovative services supported by AIN. Therefore at a later date, we 
will revisit the proper balance between providing unbundled access and 
maintaining the incentives of incumbent LECs to innovate.
    333. Parties generally do not identify proprietary concerns when 
access to call-related databases is provided via STPs. In general, 
signaling protocols used to access call-related databases adhere to 
open Bellcore standards. Parties also do not raise proprietary concerns 
with specific call-related databases themselves. Today, many separate 
carriers access incumbent LEC Toll Free Calling and LIDB databases for 
the proper routing and billing of calls. Thus, we conclude that, in 
general, unbundled access to call-related databases does not present 
proprietary concerns with respect to section 251(d)(2)(A). Incumbent 
LECs may, however, present such proprietary concerns in the arbitration 
process with regard to specific databases, and states (or the 
Commission acting pursuant to section 252(e)(5)) may take action to 
limit unnecessary access to proprietary information.
    334. We also conclude that denying access to call-related databases 
would

[[Page 45528]]

impair the ability of a competing provider to offer services such as 
Alternative Billing Services and AIN-based services. AIN-based services 
represent the cutting edge of telephone exchange services, and 
competitors would be at a significant disadvantage if they were forced 
to develop their own AIN capability immediately. In addition, the 
record indicates that deployment of call-related databases in the near 
term would represent a substantial cost to new entrants. As mentioned 
above, incumbent LECs argue that access to certain call-related 
databases is already competitively available and therefore they should 
not have to unbundle access to them. As discussed above, however, 
section 251(d)(2)(B) would only relieve an incumbent LEC of its 
unbundling obligation if other unbundled elements in its network could 
provide the same service without diminution of quality. Because of the 
absence of such elements, we conclude that a competitor's ability to 
provide service would be significantly impaired if it did not have 
unbundled access to incumbent LECs' call-related databases, including 
the LIDB, Toll Free Calling, AIN, and number portibility downstream 
databases for the purpose of switch query and database response through 
the SS7 network.
    335. We also conclude that access to call-related databases as 
discussed above, and access to the service management system discussed 
below, must be provided to, and obtained by, requesting carriers in a 
manner that complies with section 222 of the Act. Section 222, which 
was effective upon adoption, sets out requirements for privacy of 
customer information. Section 222(a) provides that all 
telecommunications carriers have a duty to protect the confidentiality 
of proprietary information of other carriers, including resellers, 
equipment manufacturers, and customers. Section 222(b) requires that 
telecommunications carriers that use proprietary information obtained 
from another telecommunications carrier in providing any 
telecommunications service ``shall use that information only for such 
purpose, and shall not use such information for its own marketing 
purposes.'' Sections 222 (c) and (d) provide protection for, and 
limitations on the use of, and access to, customer proprietary network 
information (CPNI). We note that we have initiated a proceeding to 
clarify the obligations of carriers with regard to sections 222 (c) and 
(d).
(3) Service Management Systems
    336. Finally, we conclude that incumbent LECs should provide 
access, on an unbundled basis, to the service management systems (SMS), 
which allow competitors to create, modify, or update information in 
call-related databases. We believe it is technically feasible for 
incumbent LECs to provide access to the SMS in the same manner and 
method that they provide for their own access. We find that such access 
is necessary for competitors to effectively use call-related databases, 
which we have already found to be critical to entry in the local 
exchange market.
    337. Commenters argue that they need equal access to incumbent 
LECs' SMSs to write or populate their own information in call-related 
databases. As discussed above, information bound for many call-related 
databases is entered first at an off-line SMS, which then downloads the 
information to the call-related database for real time use on the 
network. We find that competing provider access to the SMS is 
technically feasible if it is provided in the same or equivalent manner 
that the incumbent LEC currently uses to provide such access to itself. 
For example, if the incumbent LEC inputs information into the SMS using 
magnetic tapes, the competitive carrier must be able to create and 
submit magnetic tapes for the incumbent to input into the SMS in the 
same way the incumbent inputs its own magnetic tapes. If the incumbent 
accesses the SMS through an electronic interface, the competitive 
carrier should be able to access the SMS through an equivalent 
electronic interface. We further conclude that, whatever method is 
used, the incumbent LEC must provide the competing carrier with the 
information necessary to correctly enter or format for entry the 
information relevant for input into the particular incumbent LEC SMS.
    338. Specifically with respect to AIN, we find that the record in 
the Intelligent Networks proceeding supports access to the SMS. A 
competing carrier seeking access to the SMS that is part of the 
incumbent LEC's AIN would do so through the incumbent LEC's service 
creation environment (SCE), an interface used to design, create, and 
test AIN supported services. Software successfully tested in the SCE is 
transferred to the SMS, where it is then downloaded into an SCP 
database for active deployment on the network. We are persuaded that 
the risk of harm to the public switched network from such access to the 
SMS is minimized by the technical safeguards inherent in the SCE and 
SMS. As described in comments filed in the Intelligent Networks docket, 
competitors accessing the SCE and SMS would not communicate directly 
with the LEC's database or switch. We therefore conclude that such 
access is technically feasible, and that incumbent LECs should provide 
requesting carriers with the same access to design, create, test, and 
deploy AIN-based services at the SMS that the incumbent LEC provides 
for itself. While many incumbent LECs express concerns with the 
technical feasibility of access to AIN, we conclude that those concerns 
deal primarily with the interconnection of third party AIN SCP 
databases to the incumbent LEC's AIN and not access to the SCE and SMS.
    339. We recognize that, although technically feasible, providing 
nondiscriminatory access to the SMS and SCE for the creation and 
deployment of AIN services may require some modifications, including 
appropriate mediation, to accommodate such access by requesting 
carriers. We note that BellSouth is currently prepared to tariff and 
offer such access to third parties, and other incumbent LECs, including 
Bell Atlantic and Ameritech, indicate that they have made significant 
progress towards implementing such access. Therefore, if parties are 
unable to agree to appropriate mediation mechanisms through 
negotiations, we conclude that during arbitration of such issues the 
states (or the Commission acting pursuant to section 252(e)(5)) must 
consider whether such mediation mechanisms will be available and will 
adequately protect against intentional or unintentional misuses of the 
incumbent's AIN facilities. We again encourage incumbent LECs and 
competitive carriers to participate in industry fora and industry 
testing to resolve outstanding mediation concerns.
    340. Parties did identify some proprietary concerns regarding 
access to the SCE and SMS used in the incumbent LEC's AIN. Some 
incumbent LECs contend that the interface used at the SCE is 
proprietary in nature. GVNW argues that specific AIN-based services 
designed by carriers should be proprietary in nature. Competitors 
correctly argue that AIN can be used, not only for telecommunication 
services traditionally supported by the switch, but as a means to 
deploy advanced services not otherwise possible. We find that competing 
providers without access to AIN would be at a significant disadvantage 
to incumbent LECs, because they could not necessarily offer the same 
services to the customer. This access will help competing providers 
without imposing costs on incumbent

[[Page 45529]]

LECs because the entrants will pay the cost. We therefore conclude, 
under section 251(d)(2)(A), that access to AIN, including those 
elements that may be proprietary, is necessary for successful entry 
into the local service market.
    341. Most parties generally did not identify proprietary concerns 
with access to those SMSs used other than for AIN. Some parties, 
however, argue that there are proprietary interfaces used to enter 
information into various databases. Competing carriers counter that 
competitive providers would not need to have direct access to the 
proprietary methods of data entry used by incumbent LECs, and as a 
result we conclude that the unbundled access to SMSs used for other 
than AIN does not present proprietary concerns with respect to section 
251(d)(2)(A).
    342. We also conclude that unbundled access to all SMSs is 
necessary for a competing provider to effectively use unbundled call-
related databases. We find that the inability of competing carriers to 
use the SMS in the same manner that an incumbent LEC uses to input data 
itself would impair the ability of a competing carrier to effectively 
offer services to its customers using unbundled call-related databases. 
Commenters in the record point out that access to call-related 
databases alone would not allow the competing carrier to provide such 
services to its customers without access to an SMS. We also conclude 
that AIN-based services are important to a new entrant's ability to 
compete effectively for customers with the incumbent LEC, and in 
developing new business by introducing new AIN based services. Thus we 
conclude that a competitor's ability to provide service would be 
significantly impaired if it did not have unbundled access to an 
incumbent LEC's SMS, including access to the SMS(s) used to input data 
to the LIDB, Toll Free Calling, Number Portability and AIN call-related 
databases.
    343. We reject the contention by several incumbent LECs that 
signaling and database access was meant by the 1996 Act to apply only 
to such access as is necessary for call routing and completion. 
Although the competitive checklist for BOC entry into in-region 
interLATA services under section 271 requires ``nondiscriminatory 
access to databases and associated signaling necessary for call routing 
and completion'' the definition of a network element is more 
comprehensive in scope. A network element as defined by the 1996 Act 
includes ``databases'' and in particular ``databases sufficient for 
billing and collection or used in the transmission, routing, or other 
provision of a telecommunications service.'' We find that the inclusion 
of ``other provision of a telecommunications service'' meant Congress 
intended the unbundling of databases to be read broadly and could 
include databases beyond those directly used in the transmission or 
routing of a telecommunications service.
(4) Third Party Call-Related Databases
    344. We find that there is not enough evidence in the record to 
make a determination as to the technical feasibility of interconnection 
of third party call-related databases to the incumbent LEC's signaling 
system. Some parties argue that such interconnection, including the 
interconnection of third party AIN SCP databases, would allow them to 
provide more efficient or advanced call processing and services to 
customers, thereby increasing their ability to compete with the 
incumbent LEC. AT&T and MCI specifically argue that it would be 
technically feasible for them to interconnect their AIN SCP database to 
an incumbent LEC's AIN for the purpose of providing call processing 
instructions to the incumbent LEC's switch. Incumbent LECs contend that 
such interconnection would leave their switch vulnerable to a multitude 
of potential harms because sufficient mediation for such 
interconnection does not currently exist at the STP or SCP and has not 
yet been developed. AT&T counters that there is no need for additional 
mediation and that sufficient certification and testing of AIN based 
services before deployment in such a fashion is technically feasible.
    345. At this time, in view of this record and the record compiled 
in the Intelligent Networks docket, we cannot make a determination of 
the technical feasibility of such interconnection. We do, however, 
believe that state commissions could find such an arrangement to be 
technically feasible and we do not intend to preempt such an order 
through these rules. The Illinois Commission recently ordered access to 
incumbent LECs' AIN that does allow for this type of interconnection. 
We intend to address this issue early in 1997, either in the IN docket 
or in a subsequent phase of this proceeding, taking into account, inter 
alia, any relevant decisions of state commissions.
    346. We also address the impact on small incumbent LECs. For 
example, GVNW asserts that any national rule requiring this form of 
interconnection would require many small incumbent LECs to make 
uneconomic upgrades of their switches in order to accommodate it. We 
have considered the economic impact of our rules in this section on 
small incumbent LECs. Accordingly, we have not adopted any national 
standards concerning AIN at this time. We also note that section 251(f) 
provides relief for certain small LECs from our regulations 
implementing section 251.
5. Operation Support Systems
a. Background
    347. We sought comment, in the NPRM, on whether national 
requirements for electronic ordering interfaces would reduce the time 
and resources required for new entrants to enter and compete in 
regional markets. We also sought comment on the unbundling of databases 
generally in our discussion on unbundling database and signaling 
systems.
b. Discussion
    348. We conclude that operations support systems and the 
information they contain fall squarely within the definition of 
``network element'' and must be unbundled upon request under section 
251(c)(3), as discussed below. Congress included in the definition of 
``network element'' the terms ``databases'' and ``information 
sufficient for billing and collection or used in the transmission, 
routing, or other provision of a telecommunications service.'' We 
believe that the inclusion of these terms in the definition of 
``network element'' is a recognition that the massive operations 
support systems employed by incumbent LECs, and the information such 
systems maintain and update to administer telecommunications networks 
and services, represent a significant potential barrier to entry. It is 
these systems that determine, in large part, the speed and efficiency 
with which incumbent LECs can market, order, provision, and maintain 
telecommunications services and facilities. Thus, we agree with 
Ameritech that ``[o]perational interfaces are essential to promote 
viable competitive entry.''
    349. Nondiscriminatory access to operations support systems 
functions can be viewed in at least three ways. First, operations 
support systems themselves can be characterized as ``databases'' or 
``facilit[ies] * * * used in the provision of a telecommunications 
service,'' and the functions performed by such systems can be 
characterized as ``features, functions, and capabilities that are 
provided by means of such facilit[ies].'' Second, the information 
contained in, and processed by operations support systems can be 
classified as

[[Page 45530]]

``information sufficient for billing and collection or used in the 
transmission, routing, or other provision of a telecommunications 
service.'' Third, nondiscriminatory access to the functions of 
operations support systems, which would include access to the 
information they contain, could be viewed as a ``term or condition'' of 
unbundling other network elements under section 251(c)(3), or resale 
under section 251(c)(4). Thus, we conclude that, under any of these 
interpretations, operations support systems functions are subject to 
the nondiscriminatory access duty imposed by section 251(c)(3), and the 
duty imposed by section 251(c)(4) to provide resale services under 
just, reasonable, and nondiscriminatory terms and conditions.
    350. Much of the information maintained by these systems is 
critical to the ability of other carriers to compete with incumbent 
LECs using unbundled network elements or resold services. Without 
access to review, inter alia, available telephone numbers, service 
interval information, and maintenance histories, competing carriers 
would operate at a significant disadvantage with respect to the 
incumbent. Other information, such as the facilities and services 
assigned to a particular customer, is necessary to a competing 
carrier's ability to provision and offer competing services to 
incumbent LEC customers. Finally, if competing carriers are unable to 
perform the functions of pre-ordering, ordering, provisioning, 
maintenance and repair, and billing for network elements and resale 
services in substantially the same time and manner that an incumbent 
can for itself, competing carriers will be severely disadvantaged, if 
not precluded altogether, from fairly competing. Thus providing 
nondiscriminatory access to these support systems functions, which 
would include access to the information such systems contain, is vital 
to creating opportunities for meaningful competition.
    351. As noted in the comments above, several state commissions have 
ordered real-time access or have ongoing proceedings working to develop 
and implement it within their jurisdictions. The New York Commission, 
building on its pioneering experience with the Rochester Telephone 
``Open Market Plan,'' has facilitated a working group on electronic 
interfaces comprised of both incumbent LECs and potential competitors. 
The New York Commission focused on these issues in response to the 
frustrations and concerns of resellers in the Rochester market. In 
particular, AT&T alleged that it was ``severely disadvantaged due to 
the fact that [Rochester Telephone] has failed to provide procedures 
for resellers to access [their] databases for on-line queries needed to 
perform basic service functions [such] as scheduling customer 
appointments.'' The New York Commission has concluded that wherever 
possible NYNEX will provide new entrants with real-time electronic 
access to its systems. As another example, the Georgia Commission 
recently ordered BellSouth to provide electronic interfaces such that 
resellers have the same access to operations support systems and 
informational databases as BellSouth does, including interfaces for 
pre-ordering, ordering and provisioning, service trouble reporting, and 
customer daily usage. In testimony before the Georgia Commission, a 
BellSouth witness acknowledged that ``[n]o one is happy, believe me, 
with a system that is not fully electronic.'' As noted above, Georgia 
ordered BellSouth to establish these interfaces within two months of 
its order (by July 15, 1996), but recently extended the deadline an 
additional month (to August 15th). Both the Illinois and Indiana 
Commissions ordered incumbent LECs immediately to provide to 
competitors access to operational interfaces at parity with those 
provided to their own retail customers, or submit plans with specific 
timetables for achieving such access. Several other states have passed 
laws or adopted rules ordering incumbent LECs to provide interfaces for 
access equal to that the incumbent provides itself. We recognize the 
lead taken by these states and others, and we generally rely upon their 
conclusions in this Order.
    352. We conclude that providing nondiscriminatory access to 
operations support systems functions is technically feasible. Incumbent 
LECs today provide IXCs with different types of electronic ordering or 
trouble interfaces that demonstrate the feasibility of such access, and 
perhaps also provide a basis for adapting such interfaces for use 
between local service providers. Further, as discussed above, several 
incumbent LECs, including NYNEX and Bell Atlantic, are already testing 
and operating interfaces that support limited functions, and are 
developing the interfaces to support access to the remaining functions 
identified by most potential competitors. Some incumbent LECs 
acknowledge that nondiscriminatory access to operations support systems 
functions is technically feasible. Finally, several industry groups are 
actively establishing standards for inter-telecommunications company 
transactions.
    353. Section 251(d)(2)(A) requires the Commission to consider 
whether ``access to such network elements as are proprietary in nature 
is necessary.'' Incumbent LECs argue that there are proprietary 
interfaces used to access these databases and information. Parties 
seeking to compete with incumbent LECs counter that access to such 
databases and information is vitally important to the ability to 
broadly compete with the incumbent. As discussed above, competitors 
also argue that such access is necessary to order, provision, and 
maintain unbundled network elements and resold services, and to market 
competing services effectively to an incumbent LEC's customers. We find 
that it is absolutely necessary for competitive carriers to have access 
to operations support systems functions in order to successfully enter 
the local service market.
    354. Section 251(d)(2)(B) requires the Commission to consider 
whether ``the failure to provide access to such network elements would 
impair the ability of the telecommunications carrier seeking access to 
provide the services that it seeks to offer.'' As mentioned above, 
parties identified access to operations support systems functions as 
critical to the provision of local service. We find that such 
operations support systems functions are essential to the ability of 
competitors to provide services in a fully competitive local service 
market. Therefore, we conclude that competitors' ability to provide 
service successfully would be significantly impaired if they did not 
have access to incumbent LECs' operations support systems functions.
    355. We thus conclude that an incumbent LEC must provide 
nondiscriminatory access to their operations support systems functions 
for pre-ordering, ordering, provisioning, maintenance and repair, and 
billing available to the LEC itself. We adopt the definition of these 
terms as set forth in the AT&T-Bell Atlantic Joint Ex Parte as the 
minimum necessary for our requirements. We note, however, that 
individual incumbent LEC's operations support systems may not clearly 
mirror these definitions. Nevertheless, incumbent LECs must provide 
nondiscriminatory access to the full range of functions within pre-
ordering, ordering, provisioning, maintenance and repair and billing 
enjoyed by the incumbent LEC. Such nondiscriminatory access necessarily 
includes access to the functionality of

[[Page 45531]]

any internal gateway systems the incumbent employs in performing the 
above functions for its own customers. For example, to the extent that 
customer service representatives of the incumbent have access to 
available telephone numbers or service interval information during 
customer contacts, the incumbent must provide the same access to 
competing providers. Obviously, an incumbent that provisions network 
resources electronically does not discharge its obligation under 
section 251(c)(3) by offering competing providers access that involves 
human intervention, such as facsimile-based ordering.
    356. We recognize that, although technically feasible, providing 
nondiscriminatory access to operations support systems functions may 
require some modifications to existing systems necessary to accommodate 
such access by competing providers. Although, as discussed above, many 
incumbent LECs are actively developing these systems, even the largest 
and most advanced incumbent LECs have not completed interfaces that 
provide such access to all of their support systems functions. State 
commissions such as Georgia, Illinois, and Indiana, however, have 
ordered that such access be made available to requesting carriers in 
the near term. As a practical matter, the interfaces developed by 
incumbents to accommodate nondiscriminatory access will likely provide 
such access for services and elements beyond a particular state's 
boundaries, and thus we believe that requirements for such access by a 
small number of states representing a cross-section of the country will 
quickly lead to incumbents providing access in all regions.
    357. In all cases, however, we conclude that in order to comply 
fully with section 251(c)(3) an incumbent LEC must provide, upon 
request, nondiscriminatory access to operations support systems 
functions for pre-ordering, ordering, provisioning, maintenance and 
repair, and billing of unbundled network elements under section 
251(c)(3) and resold services under section 251(c)(4). Incumbent LECs 
that currently do not comply with this requirement of section 251(c)(3) 
must do so as expeditiously as possible, but in any event no later than 
January 1, 1997. We believe that the record demonstrates that incumbent 
LECs and several national standards-setting organizations have made 
significant progress in developing such access. This progress is also 
reflected in a number of states requiring competitor access to these 
transactional functions in the near term. Thus, we believe that it is 
reasonable to expect that by January 1, 1997, new entrants will be able 
to compete for end user customers by obtaining nondiscriminatory access 
to operations support systems functions.
    358. We have considered the economic impact of our rules in this 
section on small incumbent LECs. For example, RTC urges us to recognize 
the differences between carriers in regards to computerized network 
administration and operational interfaces. Our requirement of 
nondiscriminatory access to operations support systems recognizes that 
different incumbent LECs possess different existing systems. We also 
note, however, that section 251(f) of the 1996 Act provides relief for 
certain small LECs from our regulations implementing section 251.
    359. Ideally, each incumbent LEC would provide access to support 
systems through a nationally standardized gateway. Such national 
standards would eliminate the need for new entrants to develop multiple 
interface systems, one for each incumbent. We believe that the progress 
made by standards-setting organizations to date evidences a strong 
national movement toward such a uniform standard. For example, both 
AT&T and Bell Atlantic agree that, given appropriate guidance from the 
Commission, the industry can achieve consensus on national standards 
such that within 12 months 95% of all inter-telecommunications company 
transactions may be processed via nationally standardized electronic 
gateways.
    360. In order to ensure continued progress in establishing national 
standards, we propose to monitor closely the progress of industry 
organizations as they implement the rules adopted in this proceeding. 
Depending upon the progress made, we will make a determination in the 
near future as to whether our obligations under the 1996 Act require us 
to issue a separate notice of proposed rulemaking or take other action 
to guide industry efforts at arriving at appropriate national standards 
for access to operations support systems.
6. Other Network Elements
a. Background
    361. In the NPRM, we requested comment on other network elements 
the Commission should require incumbent LECs to unbundle. We 
tentatively concluded that ``subscriber numbers'' and ``operator call 
completion services'' should be unbundled. We also, under our 
discussion of section 251(b)(3), sought comment on nondiscriminatory 
access to telephone numbers, operator services, and directory 
assistance.
b. Discussion
(1) Operator Services and Directory Assistance
    362. We conclude that incumbent LECs are under the same duty to 
permit competing carriers nondiscriminatory access to operator services 
and directory assistance as all LECs are under section 251(b)(3). We 
further conclude that, if a carrier requests an incumbent LEC to 
unbundle the facilities and functionalities providing operator services 
and directory assistance as separate network elements, the incumbent 
LEC must provide the competing provider with nondiscriminatory access 
to such facilities and functionalities at any technically feasible 
point. We believe that these facilities and functionalities are 
important to facilitate competition in the local exchange market. 
Further, the 1996 Act imposes upon BOCs, as a condition of entry into 
in-region interLATA services the duty to provide nondiscriminatory 
access to directory assistance services and operator call completion 
services. We therefore conclude that unbundling facilities and 
functionalities providing operator services and directory assistance is 
consistent with the intent of Congress.
    363. As discussed in our section on nondiscriminatory access under 
section 251(b)(3), the provision of nondiscriminatory access to 
operator services and directory assistance must conform to the 
requirements of section 222, which restricts carrier's use of CPNI. In 
particular, access to directory assistance and underlying directory 
information does not require incumbent LECs to provide access to 
unlisted or unpublished telephone numbers, or other information that 
the incumbent LEC's customer has requested the LEC not to make 
available. In conforming to section 222, we anticipate that incumbent 
LECs will provide such access in a manner that will protect against the 
inadvertent release of unlisted customer names and numbers.
    364. We note that several competitors advocate unbundling the 
facilities and functionalities providing operator services and 
directory assistance from particular resold services or the unbundled 
local switching element, so that a competing provider can provide these 
services to its customers supported by its own systems rather than 
those of the incumbent LEC. Some incumbent LECs argue that such 
unbundling, however, is not technically feasible because of their 
inability to

[[Page 45532]]

route individual end user calls to multiple systems. We find that 
unbundling both the facilities and functionalities providing operator 
services and directory assistance as separate network elements will be 
beneficial to competition and will aid the ability of competing 
providers to differentiate their service from the incumbent LECs. We 
also note that the Illinois Commission has recently ordered such 
access. We therefore find that incumbent LECs must unbundle the 
facilities and functionalities providing operator services and 
directory assistance from resold services and other unbundled network 
elements to the extent technically feasible. As discussed above in our 
section on unbundled switching, we require incumbent LECs, to the 
extent technically feasible, to provide customized routing, which would 
include such routing to a competitor's operator services or directory 
assistance platform.
    365. We also note that some competitors seek access to operator 
services and directory assistance in order to serve their own 
customers. Some of these parties argue that nondiscriminatory access to 
such network elements requires incumbent LECs to provide rebranded 
operator call completion services and directory assistance to the 
competing carrier's customers. Incumbent LECs argue that the provision 
of these services on an unbranded or rebranded basis is not technically 
feasible because of their inability at the operator services or 
directory assistance platforms to identify the carrier serving the end 
user. As we concluded in our discussion on section 251(b)(3), we find 
that incumbent LECs must permit nondiscriminatory access to both 
operator services and directory assistance in the same manner required 
of all LECs. We make no finding on the technical feasibility of 
providing branded or unbranded service to competitors based on the 
record before us. We note, however, that the Illinois Commission has 
ordered incumbent LECs to provide rebranded operator call completion 
services and directory assistance to requesting competitive carriers.
    366. As discussed above, incumbent LECs must provide access to 
databases as unbundled network elements. We find that the databases 
used in the provision of both operator call completion services and 
directory assistance must be unbundled by incumbent LECs upon a request 
for access by a competing provider. In particular, the directory 
assistance database must be unbundled for access by requesting 
carriers. Such access must include both entry of the requesting 
carrier's customer information into the database, and the ability to 
read such a database, so as to enable requesting carriers to provide 
operator services and directory assistance concerning incumbent LEC 
customer information. We clarify, however, that the entry of a 
competitor's customer information into an incumbent LEC's directory 
assistance database can be mediated by the incumbent LEC to prevent 
unauthorized use of the database. We find that the arrangement ordered 
by the California Commission concerning the shared use of such a 
database by Pacific Bell and GTE is one possible method of providing 
such access.
    367. Section 251(d)(2)(A) requires the Commission to consider 
whether ``access to such network elements as are proprietary in nature 
is necessary.'' Parties generally did not identify proprietary concerns 
with unbundling access to operator call completion services or 
directory assistance. Incumbent LECs generally did not claim a 
proprietary interest in their directory assistance databases. Many 
parties contend that proprietary interests leading to restrictions on 
use or sharing of such database information would injure their ability 
to compete effectively for local service. For the reasons described 
below, we find that access to the systems supporting both operator call 
completion services and directory assistance is necessary for new 
entrants to provide competing local exchange service.
    368. Section 251(d)(2)(B) requires the Commission to consider 
whether ``the failure to provide access to such network elements would 
impair the ability of the telecommunications carrier seeking access to 
provide the services that it seeks to offer.'' Parties identified 
access to operator call completion services and directory assistance as 
critical to the provision of local service. Therefore we conclude that 
competitors' ability to provide service would be significantly impaired 
if they did not have access to incumbent LEC's operator call completion 
services and directory assistance.
(2) Subscriber Numbers
    369. Some commenters argue that the Commission should require 
incumbent LECs to unbundle access to subscriber numbers. We conclude 
that no Commission action under section 251(b)(3) is required at this 
time to ensure nondiscriminatory access to subscriber numbers. Issues 
regarding access to subscriber numbers will be addressed by our 
implementation of section 251(e).

VI. Methods of Obtaining Interconnection and Access to Unbundled 
Elements

    370. In this section, we address the means of achieving 
interconnection and access to unbundled network elements that incumbent 
LECs are required to make available to requesting carriers.

A. Overview

1. Background
    371. Section 251(c)(2) requires incumbent LECs to provide 
interconnection with the LEC's network ``for the facilities and 
equipment of any requesting telecommunications carrier.'' Section 
251(c)(6) imposes upon incumbent LECs ``the duty to provide * * * for 
physical collocation of equipment necessary for interconnection or 
access to unbundled network elements at the premises of the [LEC], 
except that the carrier may provide for virtual collocation if the 
[LEC] demonstrates to the State commission that physical collocation is 
not practical for technical reasons or because of space limitations.'' 
In the NPRM, we noted that section 251(c)(6) does not expressly limit 
the Commission's authority under section 251(c)(2) to establish rules 
requiring incumbent LECs to make available a variety of methods of 
interconnection, except in situations where the incumbent can 
demonstrate to the State commission that physical collocation is not 
practical for technical reasons or space limitations. We tentatively 
concluded that the Commission has the authority to require any 
reasonable method of interconnection, including physical collocation, 
virtual collocation, and meet point interconnection arrangements. Under 
the Commission's Expanded Interconnection rules, LECs are not required 
to offer a collocating carrier a choice between physical and virtual 
collocation. Special Access Order, 57 FR 54323 (November 18, 1992); 
Switched Transport Order, 58 FR 48756 (September 17, 1993); see also 
Physical Collocation Designation Order, 8 FCC Rcd 4589 (under our 
Expanded Interconnection rules, LECs must provide virtual collocation 
where: virtual collocation is available on an intrastate basis; a LEC 
has negotiated an interstate virtual collocation arrangement; LECs are 
exempted from providing physical collocation because of space 
constraints; or a state commission has granted a waiver). Also, see 
Section VI.B.1.b. regarding the

[[Page 45533]]

definitions of physical and virtual collocation.
2. Discussion
    372. We conclude that, under sections 251(c)(2) and 251(c)(3), any 
requesting carrier may choose any method of technically feasible 
interconnection or access to unbundled elements at a particular point. 
Section 251(c)(2) imposes an interconnection duty at any technically 
feasible point; it does not limit that duty to a specific method of 
interconnection or access to unbundled elements.
    373. Physical and virtual collocation are the only methods of 
interconnection or access specifically addressed in section 251. Under 
section 251(c)(6), incumbent LECs are under a duty to provide physical 
collocation of equipment necessary for interconnection unless the LEC 
can demonstrate that physical collocation is not practical for 
technical reasons or because of space limitations. In that event, the 
incumbent LEC is still obligated to provide virtual collocation of 
interconnection equipment. Under section 251, the only limitation on an 
incumbent LEC's duty to provide interconnection or access to unbundled 
elements at any technically feasible point is addressed in section 
251(c)(6) regarding physical collocation. Unless a LEC can establish 
that the specific technical or space limitations in subsection (c)(6) 
are met with respect to physical collocation, we conclude that 
incumbent LECs must provide for any technically feasible method of 
interconnection or access requested by a competing carrier, including 
physical collocation. If, for example, we interpreted section 251(c)(6) 
to limit the means of interconnection available to requesting carriers 
to physical and virtual collocation, the requirement in section 
251(c)(2) that interconnection be made available ``at any technically 
feasible point'' would be narrowed dramatically to mean that 
interconnection was required only at points where it was technically 
feasible to collocate equipment. We are not pursuaded that Congress 
intended to limit interconnection points to locations only where 
collocation is possible.
    374. Section 251(c)(6) provides the Commission with explicit 
authority to mandate physical collocation as a method of providing 
interconnection or access to unbundled elements. Such authority was 
previously found lacking by the U.S. Court of Appeals for the D.C. 
Circuit in Bell Atlantic v. FCC, (Bell Atlantic Telephone Companies v. 
FCC, 24 F.3d 1441 (D.C. Cir. 1994) (Bell Atlantic v. FCC)), which was 
decided prior to enactment of the 1996 Act. While section 251(c)(6) 
limits an incumbent LEC's duty to provide physical collocation in 
certain circumstances, we find that it does not limit our authority to 
require, under sections 251 (c)(2) and (c)(3), the provision of virtual 
collocation. We note that under our Expanded Interconnection rules, 
that were amended subsequent to the Bell Atlantic decision, competitive 
entrants using physical collocation were required by many incumbent 
LECs to convert to virtual collocation. If the Commission concluded 
that subsection (c)(6) places a limitation on our authority to require 
virtual collocation, competitive providers would be required to 
undertake costly and burdensome actions to convert back to physical 
collocation even if they were satisfied with existing virtual 
collocation arrangements. We conclude that Congress did not intend to 
impose such a burden on requesting carriers that wish to continue to 
use virtual collocation for purposes of section 251(c). Further, the 
record indicates that this requirement would be costly and would delay 
competition. In short, we conclude that, in enacting section 251(c)(6), 
Congress intended to expand the interconnection choices available to 
requesting carriers, not to restrict them.
    375. We also conclude that requiring incumbent LECs to provide 
virtual collocation and other technically feasible methods of 
interconnection or access to unbundled elements is consistent with 
Congress' desire to facilitate entry into the local telephone market by 
competitive carriers. In certain circumstances, competitive carriers 
may find, for example, that virtual collocation is less costly or more 
efficient than physical collocation. We believe that this may be 
particularly true for small carriers which lack the financial resources 
to physically collocate equipment in a large number of incumbent LEC 
premises. Moreover, since requesting carriers will bear the costs of 
other methods of interconnection or access, this approach will not 
impose an undue burden on the incumbent LECs.
    376. Consistent with this view, other methods of technically 
feasible interconnection or access to incumbent LEC networks, such as 
meet point arrangements, in addition to virtual and physical 
collocation, must be available to new entrants upon request. See 
Teleport comments at 26-30; see also Washington Utilities and 
Transportation Commission, Fourth Supplemental Order Rejecting Tariff 
Filings and Ordering Refiling; Granting Complaints, in Part, 
(Washington Commission Oct. 31, 1995), Docket No. UT-941464, at 45; 
Application of Electric Lightwave, Inc., MFS Intelnet of Oregon, Inc., 
and MCI Metro Access Transmission Services, Inc., Public Utility 
Commission of Oregon Order, Order No. 96-021, (Oregon Commission Jan. 
12, 1996), at 68-69; Rules for Telecommunications Interconnection and 
Unbundling, Arizona Corporation Commission Order, Decision No. 59483, 
(Arizona Commission Jan. 11, 1996), Proposed Rule R14-2-1303 
(Attachment E hereto). Meet point arrangements (or mid-span meets), for 
example, are commonly used between neighboring LECs for the mutual 
exchange of traffic, and thus, in general, we believe such arrangements 
are technically feasible. The Michigan Commission recently required 
Ameritech to provide meet point interconnection. Michigan Public 
Service Commission, Case No. U-10860 (Michigan June 5, 1996) at 18 n.4. 
Further, although the creation of meet point arrangements may require 
some build out of facilities by the incumbent LEC, we believe that such 
arrangements are within the scope of the obligations imposed by 
sections 251(c)(2) and 251(c)(3). In a meet point arrangement, the 
``point'' of interconnection for purposes of sections 251(c)(2) and 
251(c)(3) remains on ``the local exchange carrier's network'' (e.g., 
main distribution frame, trunk-side of the switch), and the limited 
build-out of facilities from that point may then constitute an 
accommodation of interconnection. In a meet point arrangement each 
party pays its portion of the costs to build out the facilities to the 
meet point. We believe that, although the Commission has authority to 
require incumbent LECs to provide meet point arrangements upon request, 
such an arrangement only makes sense for interconnection pursuant to 
section 251(c)(2) but not for unbundled access under section 251(c)(3). 
New entrants will request interconnection pursuant to section 251(c)(2) 
for the purpose of exchanging traffic with incumbent LECs. In this 
situation, the incumbent and the new entrant are co-carriers and each 
gains value from the interconnection arrangement. Under these 
circumstances, it is reasonable to require each party to bear a 
reasonable portion of the economic costs of the arrangement. In an 
access arrangement pursuant to section 251(c)(3), however, the 
interconnection point will be a part of the new entrant's network and 
will be used to carry traffic from one element in the new entrant's 
network to another. We conclude that in a section 251(c)(3)

[[Page 45534]]

access situation, the new entrant should pay all of the economic costs 
of a meet point arrangement. Regarding the distance from an incumbent 
LEC's premises that an incumbent should be required to build out 
facilities for meet point arrangements, we believe that the parties and 
state commissions are in a better position than the Commission to 
determine the appropriate distance that would constitute the required 
reasonable accommodation of interconnection.
    377. Finally, in accordance with our interpretation of the term 
``technically feasible,'' we conclude that, if a particular method of 
interconnection is currently employed between two networks, or has been 
used successfully in the past, a rebuttable presumption is created that 
such a method is technically feasible for substantially similar network 
architectures. Moreover, because the obligation of incumbent LECs to 
provide interconnection or access to unbundled elements by any 
technically feasible means arises from sections 251(c)(2) and 
251(c)(3), we conclude that incumbent LECs bear the burden of 
demonstrating the technical infeasibility of a particular method of 
interconnection or access at any individual point.

B. Collocation

1. Collocation Standards
a. Adoption of National Standards
(1) Background
    378. In the NPRM we tentatively concluded that we should adopt 
national rules for virtual and physical collocation. This tentative 
conclusion was based on the belief that national standards would help 
to speed the development of competition. We also sought comment on 
specific national standards that we might adopt, and on whether any 
specific state approaches would serve as an appropriate model.
(2) Discussion
    379. We conclude that we should adopt explicit national rules to 
implement the collocation requirements of the 1996 Act. We find that 
specific rules defining minimum requirements for nondiscriminatory 
collocation arrangements will remove barriers to entry by potential 
competitors and speed the development of competition. Our experience in 
the Expanded Interconnection proceeding indicates that incumbent LECs 
have an economic incentive to interpret regulatory ambiguities to delay 
entry by new competitors. Our review of the LECs' initial physical and 
virtual collocation tariffs raised significant concerns regarding the 
implementation of our Expanded Interconnection requirements and 
resulted in the designation of numerous issues for investigation. The 
Commission has not yet reached decisions on most of these issues, 
though it has found that certain rates for virtual collocation were 
unlawful. We and the states should therefore adopt, to the extent 
possible, specific and detailed collocation rules. We find, however, 
that states should have flexibility to apply additional collocation 
requirements that are otherwise consistent with the 1996 Act and our 
implementing regulations.
b. Adoption of Expanded Interconnection Terms and Conditions for 
Physical and Virtual Collocation Under Section 251
(1) Background
    380. In our Expanded Interconnection proceeding, we required LECs 
to offer expanded interconnection to all interested parties, which 
allowed competitors and end users to terminate their own special access 
and switched transport access transmission facilities at LEC central 
offices. Expanded Interconnection with Local Telephone Company 
Facilities, First Report and Order, 57 FR 54323 (November 18, 1992) 
(Special Access Order), vacated in part and remanded, Bell Atlantic, 24 
F.3d 1441 (1994); First Reconsideration, 57 FR 62481 (December 31, 
1992); vacated in part and remanded, Bell Atlantic, 24 F.3d 1441; 
Second Reconsideration, 58 FR 48752 (September 17, 1993); Second Report 
and Order, 58 FR 48756 (September 17, 1993) (Switched Transport Order), 
vacated in part and remanded, Bell Atlantic Telephone Cos., v. FCC, 24 
F.3d 1441; Remand Order, 9 FCC Rcd 5154 (1994) (Virtual Collocation 
Order), remanded for consideration of 1996 Act, Pacific Bell, et al. v. 
FCC, 81 F.3d 1147 (1996) (collectively referred to as Expanded 
Interconnection). Interstate access is a service traditionally provided 
by local telephone companies and enables IXCs and other customers to 
originate and terminate interstate telephone traffic. Special access is 
a form of interstate access that uses dedicated transmission lines 
between two points, without switching the traffic on those lines. 
Switched transport is another form of interstate access comprising the 
transmission of traffic between interexchange carriers' (or other 
customers') points of presence and local telephone companies' end 
offices, where the traffic is switched and routed to end users. We 
required Tier 1 LECs to offer physical collocation, with the 
interconnecting party paying the LEC for central office floor space. 
(Tier 1 LECs are local exchange carriers having $100 million or more in 
``total company annual regulated revenues.'' Commission Requirements 
for Cost Support Material to be Filed with 1990 Annual Access Tariffs, 
5 FCC Rcd 1364, 1364 (Com. Car. Bur. 1990)). We required that LECs 
provide space to interested parties on a first-come first-served basis, 
and that they provide virtual collocation when space for physical 
collocation is exhausted. Under virtual collocation, interconnectors 
are allowed to designate central office transmission equipment 
dedicated to their use, as well as to monitor and control their 
circuits terminating in the LEC central office. Interconnectors, 
however, do not pay for the incumbent's floor space under virtual 
collocation arrangements and have no right to enter the LEC central 
office. Under our virtual collocation requirements, LECs must install, 
maintain, and repair interconnector-designated equipment under the same 
intervals and with the same or better failure rates for the performance 
of similar functions for comparable LEC equipment.
    381. In the Expanded Interconnection proceeding, we required the 
LECs to file tariffs to implement our virtual and physical collocation 
requirements. Our initial review of the LECs' tariffs raised 
significant concerns regarding the LECs' provision of physical and 
virtual collocation. Consequently, the Bureau partially suspended the 
rates proposed by many of the LECs and allowed these rates to take 
effect subject to investigation and an accounting order.
    382. In 1994, the U.S. Court of Appeals for the District of 
Columbia Circuit found that the FCC lacked the authority under section 
201 of the 1934 Communications Act to require physical collocation and 
remanded all other issues to the Commission. Bell Atlantic v. FCC, 24 
F.3d 1441. On remand, we adopted rules for both special access and 
switched transport that required LECs to provide either virtual or 
physical collocation, at the LECs' option. Those rules currently are in 
place, although the court of appeals remanded the Remand Order to us to 
consider the impact of the 1996 Act on those rules. Pacific Bell et al. 
v. FCC, 81 F.3d 1147 (D.C. Cir. 1996). As discussed below, we find that 
the 1996 Act does not supplant or otherwise alter our Expanded 
Interconnection rules for interstate interconnection services provided 
pursuant to section 201 of the Communications Act. In the 1996 Act, 
Congress specifically directed

[[Page 45535]]

incumbent LECs to provide physical collocation for interconnection and 
access to unbundled network elements, absent technical or space 
constraints, pursuant to section 251(c)(6) of the Communications Act.
    383. We sought comment in the NPRM on whether, for purposes of 
implementing physical and virtual collocation under section 251, we 
should readopt the standards set out in our Expanded Interconnection 
proceeding and, if so, how to adapt those standards to reflect the new 
statutory requirements and other policy considerations of the 1996 Act.
(2) Discussion
    384. We conclude that we should adopt the existing Expanded 
Interconnection requirements, with some modifications, as the rules 
applicable for collocation under section 251. Those rules were 
established on the basis of an extensive record in the Expanded 
Interconnection proceeding, and are largely consistent with the 
requirements of section 251(c)(6). Adoption of those requirements for 
purposes of collocation under section 251, moreover, has substantial 
support in the record of this proceeding. Thus, the standards 
established for physical and virtual collocation in our Expanded 
Interconnection proceeding will generally apply to collocation under 
section 251. The most significant requirements of Expanded 
Interconnection are specifically set out in rules we adopt here. We 
address pricing and rate structure issues separately, in section VII 
below.
    385. We find, however, that certain modifications to our Expanded 
Interconnection requirements are necessary to account for specific 
provisions of section 251(c)(6) and service arrangements that differ 
from those contemplated in our Expanded Interconnection orders. For 
example, the Expanded Interconnection requirements apply to Tier 1 LECs 
that are not NECA pool members, and section 251 applies to ``incumbent 
LECs,'' though there is an exemption for certain rural carriers. 
Expanded Interconnection also allows end-users to interconnect their 
equipment, while section 251 requires that interconnection and access 
to unbundled network elements be provided to ``any requesting 
telecommunications carrier.'' Accordingly, we set forth below several 
modifications to the terms and conditions for collocation as they are 
described in our Expanded Interconnection orders for application in 
implementing section 251. We believe that, in light of the expedited 
statutory time frame for this rulemaking and limited record addressing 
the specific terms and conditions for collocation under section 251 in 
this proceeding, it would be impractical and imprudent to develop a 
large number of new substantive collocation requirements in this order. 
We may consider the need for additional or different requirements in a 
subsequent proceeding, if we determine that such action is warranted.
    386. The most significant difference between the Expanded 
Interconnection rules and the collocation rules we adopt to implement 
the 1996 Act concerns the collocation tariffing requirement. As 
discussed below, the 1996 Act does not require that collocation be 
federally tariffed. We thus do not adopt, under section 251, the 
Expanded Interconnection tariffing requirements originally adopted 
under section 201 for physical and virtual collocation. The existing 
tariffing requirements of Expanded Interconnection for interstate 
special access and switched transport will continue to apply for use by 
customers that wish to subscribe to those interstate services.
    387. We reject SBC's contention that we may not adopt any terms and 
conditions in this proceeding that differ from those in the Expanded 
Interconnection proceeding. SBC argues that Congress intended, in 
section 251(c)(6), to use the term ``physical collocation'' as a term 
of art, and thereby to adopt wholesale the terms and conditions for 
physical collocation that the Commission adopted in the Expanded 
Interconnection proceeding. A variety of terms and conditions for 
physical collocation are possible and section 251(c)(6) makes no 
reference to the Commission's decisions on these issues in the Expanded 
Interconnection proceeding. If Congress had intended to readopt those 
rules wholesale without permitting the Commission any flexibility in 
the matter, we believe that Congress would have been more explicit 
rather than merely using the phrase ``physical collocation.'' Thus, we 
believe that we can and should modify our preexisting standards, as set 
forth below, for purposes of implementing the provisions of section 
251(c)(6). In the following sections (c.-i.) we address comments filed 
by interested parties concerning application of our existing Expanded 
Interconnection requirements for purposes of collocation under section 
251. (In a number of instances, we decline to adopt proposals for 
modifications to our Expanded Interconnection requirements.)
    388. Finally, our experience reviewing the tariffs that incumbent 
LECs filed to implement our requirements for physical and virtual 
collocation suggests that rates, terms, and conditions under which 
incumbent LECs propose to provide these arrangements pursuant to 
section 251(c)(6) bear close scrutiny. We strongly urge state 
commissions to be vigilant in their review of such arrangements. Some 
areas our investigations have found problematic in the past include 
channel assignment, letters of agency, charges for repeaters, and 
placement of point-of-termination bays. We will review this issue and 
revise our requirements as necessary.
c. The Meaning of the Term ``Premises''
(1) Background
    389. In the Expanded Interconnection proceeding, we required 
collocation at end offices, serving wire centers, and tandem switches, 
as well as at remote distribution nodes and any other points that the 
LEC treats as a ``rating point.'' A rating point is a point used in 
calculating the length of interoffice special access links. Section 
251(c)(6) requires physical collocation ``at the premises of the local 
exchange carrier.'' In the NPRM, we tentatively concluded that the term 
``premises'' includes, in addition to LEC central offices and tandem 
offices, all buildings or similar structures owned or leased by the 
incumbent LEC that house LEC network facilities. We sought comment on 
whether structures that house LEC network facilities on public rights-
of-way, such as vaults containing loop concentrators or similar 
structures, should be deemed to be LEC ``premises.''
(2) Discussion
    390. The 1996 Act does not address the definition of premises, nor 
is the term discussed in the legislative history. Therefore, we look to 
the purposes of the 1996 Act and general uses of the term ``premises'' 
in other contexts in order to define this term for purposes of section 
251(c)(6). The term ``premises'' is defined in varying ways, according 
to the context in which it is used. In light of the 1996 Act's 
procompetitive purposes, we find that a broad definition of the term 
``premises'' is appropriate in order to permit new entrants to 
collocate at a broad range of points under the incumbent LEC's control. 
A broad definition will allow collocation at points other than those 
specified for collocation under the existing Expanded Interconnection 
requirements. We find that this result is

[[Page 45536]]

appropriate because the purposes of physical and virtual collocation 
under section 251 are broader than those established in the Expanded 
Interconnection proceeding. We therefore interpret the term 
``premises'' broadly to include LEC central offices, serving wire 
centers and tandem offices, as well as all buildings or similar 
structures owned or leased by the incumbent LEC that house LEC network 
facilities. We also treat as incumbent LEC premises any structures that 
house LEC network facilities on public rights-of-way, such as vaults 
containing loop concentrators or similar structures.
    391. As discussed below, we conclude that section 251(c)(6) 
requires collocation only where technically feasible. In light of this 
conclusion, we find that adoption of a definition of ``premises'' that 
depends on whether interconnection or access to unbundled network 
elements at a particular point is ``technically feasible,'' as 
suggested by Ameritech and Pacific Telesis, would be superfluous. We 
also conclude that it is not appropriate to adopt a definition of 
``premises,'' as suggested by several parties, that is dependent on 
whether it is ``practical'' to collocate equipment at a particular 
point. We note however, that neither physical nor virtual collocation 
is required at points where not technically feasible. We therefore 
decline to adopt specific requirements regarding collocation at 
particular points in the LEC network, as suggested by GVNW and others. 
Because collocation is only required where technically feasible, the 
approach we here adopt will enable competitors to take advantage of 
opportunities to collocate equipment without imposing undue burdens on 
incumbent LECs, whether large or small.
    392. We also address the impact on small incumbent LECs. For 
example, the Rural Tel. Coalition asks that interconnection and 
collocation points be established in a flexible manner. We have 
considered the economic impact of our rules in this section on small 
incumbent LECs. For example, we do not adopt rigid requirements for 
locations where collocation must be provided. Incumbent LECs are not 
required to physically collocate equipment in locations where not 
practical for technical reasons or because of space limitations, and 
virtual collocation is required only where technically feasible. We 
also note, however, that section 251(f) of the 1996 Act provides relief 
to certain small LECs from our regulations implementing section 251.
d. Collocation Equipment
(1) Background
    393. In the Expanded Interconnection proceeding, we allowed 
collocation for central office equipment needed to terminate basic 
transmission facilities between LEC central offices and third-party 
premises. Acceptable equipment included optical terminating equipment 
and multiplexers. We did not require the LECs to permit collocation of 
enhanced services equipment or customer premises equipment because such 
equipment was not necessary to foster competition in the provision of 
basic transmission services. We also did not require LECs to allow the 
collocation of switches. Section 251(c)(6) requires incumbent LECs to 
allow collocation of ``equipment necessary for interconnection or 
access to unbundled elements. * * *'' We sought comment in the NPRM on 
what types of equipment competitors should be permitted to collocate on 
LEC premises.
(2) Discussion
    394. We believe that section 251(c)(6) generally requires that 
incumbent LECs permit the collocation of equipment used for 
interconnection or access to unbundled network elements. Although the 
term ``necessary,'' read most strictly, could be interpreted to mean 
``indispensable,'' we conclude that for the purposes of section 
251(c)(6) ``necessary'' does not mean ``indispensable'' but rather 
``used'' or ``useful.'' This interpretation is most likely to promote 
fair competition consistent with the purposes of the Act. (We note that 
this view is consistent with the findings of the Colorado Commission.) 
Colorado Public Utilities Commission, Proposed Rules Regarding 
Implementation of Secs. 40-15-101 et seq., Requirements Relating to 
Interconnection and Unbundling, Docket No. 95R-556T, (Colorado 
Commission, March 29, 1996) at 19-20. Thus, we read section 251(c)(6) 
to refer to equipment used for the purpose of interconnection or access 
to unbundled network elements. Cf. National Railroad Passenger 
Corporation v. Boston and Maine Corp., 503 U.S. 407, 417 (1992) 
(upholding the ICC's interpretation of the word ``required'' as 
``useful or appropriate,'' rather than ``indispensable''); McCulloch v. 
Maryland, 4 Wheat. 316, 413 (1819) (Chief Justice Marshall read the 
word ``necessary'' to mean ``convenient, or useful,'' rejecting a 
stricter reading of the term). Even if the collocator could use other 
equipment to perform a similar function, the specified equipment may 
still be ``necessary'' for interconnection or access to unbundled 
network elements under section 251(c)(6). We can easily imagine 
circumstances, for instance, in which alternative equipment would 
perform the same function, but with less efficiency or at greater cost. 
A strict reading of the term ``necessary'' in these circumstances could 
allow LECs to avoid collocating the equipment of the interconnectors' 
choosing, thus undermining the procompetitive purposes of the 1996 Act.
    395. Consistent with this interpretation, we conclude that 
transmission equipment, such as optical terminating equipment and 
multiplexers, may be collocated on LEC premises. We also conclude that 
LECs should continue to permit collocation of any type of equipment 
currently being collocated to terminate basic transmission facilities 
under the Expanded Interconnection requirements. In addition, whenever 
a telecommunications carrier seeks to collocate equipment for purposes 
within the scope of section 251(c)(6), the incumbent LEC shall prove to 
the State commission that such equipment is not ``necessary,'' as we 
have defined that term, for interconnection or access to unbundled 
network elements. State commissions may designate specific additional 
types of equipment that may be collocated pursuant to section 
251(c)(6).
    396. We do not find, however, that section 251(c)(6) requires 
collocation of equipment used to provide enhanced services, contrary to 
the arguments of the Association of Telemessaging Services 
International. We also decline to require incumbent LECs to allow 
collocation of any equipment without restriction. Section 251(c)(6) 
requires collocation only of equipment ``necessary for interconnection 
or access to unbundled elements.'' Section 251(c)(2) requires incumbent 
LECs to provide ``interconnection'' for the ``transmission and routing 
of telephone exchange service and exchange access,'' and section 
251(c)(3) requires incumbent LECs to provide access to unbundled 
network elements ``for the provision of a telecommunications service.'' 
Section 251(c)(6) therefore requires incumbent LECs to provide physical 
or virtual collocation only for equipment ``necessary'' or used for 
those purposes. We find that section 251(c)(6) does not require 
collocation of equipment necessary to provide enhanced services. We 
declined to require collocation of enhanced services equipment in our 
Computer III and ONA proceedings. See Third Computer

[[Page 45537]]

Inquiry, Report and Order, 51 FR 24350 (July 3, 1986); Computer III 
Remand, 57 FR 4373 (February 5, 1992). Enhanced services are defined as 
services that ``employ computer processing applications which act on 
the format, content, code, protocol or similar aspects of the 
subscriber's transmitted information; provide the subscriber 
additional, different, or restructured information; or involve 
subscriber interaction with stored information.'' 47 CFR Sec. 64.702. 
This definition appears not to include the provision of 
``telecommunications services.'' See 47 U.S.C. Sec. 153(43), (46). At 
this time, we do not impose a general requirement that switching 
equipment be collocated since it does not appear that it is used for 
the actual interconnection or access to unbundled network elements. We 
recognize, however, that modern technology has tended to blur the line 
between switching equipment and multiplexing equipment, which we permit 
to be collocated. We expect, in situations where the functionality of a 
particular piece of equipment is in dispute, that state commissions 
will determine whether the equipment at issue is actually used for 
interconnection or access to unbundled elements. We also reserve the 
right to reexamine this issue at a later date if it appears that such 
action would further achievement of the 1996 Act's procompetitive 
goals. Finally, because we lack an adequate record on the issue, we 
decline to adopt AT&T's proposal that we require that incumbent LECs 
allow collocated equipment to be used for ``hubbing.'' AT&T advocates 
requiring LECs to allow new entrants to ``connect additional equipment 
of their own to their collocated equipment in the collocated space.''
    397. In response to WinStar's suggestion that we require 
collocation of microwave transmission facilities, we note that 
collocation of microwave transmission equipment was required where 
reasonably feasible by the Special Access Order. We also require the 
collocation of microwave equipment under section 251, although we 
modify the Expanded Interconnection standard we adopt under section 251 
for when such collocation is required slightly to conform to the 
standard for the provision of physical collocation in section 
251(c)(6). We therefore require that incumbent LECs allow competitors 
to use physical collocation for microwave transmission facilities 
except where this is not practical for technical reasons or because of 
space limitations, in which case virtual collocation is required where 
technically feasible.
e. Allocation of Space
(1) Background
    398. In the Expanded Interconnection proceeding, we required LECs 
to allocate space for physical collocation on a first-come, first-
served basis. We also required LECs to take into account interconnector 
demand for collocation space when reconfiguring space or building new 
central offices, and we found that imposing reasonable restrictions on 
warehousing of space by collocating carriers was appropriate. The NPRM 
sought comment on whether national guidelines would deter 
anticompetitive behavior through the manipulation or unreasonable 
allocation of space by either incumbent LECs or new entrants.
(2) Discussion
    399. We believe that incumbent LECs have the incentive and 
capability to impede competitive entry by minimizing the amount of 
space that is available for collocation by competitors. Accordingly, we 
adopt our Expanded Interconnection space allocation rules for purposes 
of section 251, except as indicated herein. LECs will thus be required 
to make space available to requesting carriers on a first-come, first-
served basis. We also conclude that collocators seeking to expand their 
collocated space should be allowed to use contiguous space where 
available. We further conclude that LECs should not be required to 
lease or construct additional space to provide physical collocation to 
interconnectors when existing space has been exhausted. We find such a 
requirement unnecessary because section 251(c)(6) allows incumbent LECs 
to provide virtual collocation where physical collocation is not 
practical for technical reasons or because of space limitations. 
Consistent with the requirements and findings of the Expanded 
Interconnection proceeding, we conclude that incumbent LECs should be 
required to take collocator demand into account when renovating 
existing facilities and constructing or leasing new facilities, just as 
they consider demand for other services when undertaking such projects. 
We find that this requirement is necessary in order to ensure that 
sufficient collocation space will be available in the future. We 
decline, however, to adopt a general rule requiring LECs to file 
reports on the status and planned increase and use of space. State 
commissions will determine whether sufficient space is available for 
physical collocation, and we conclude that they have authority under 
the 1996 Act to require incumbent LECs to file such reports. We expect 
individual state commissions to determine whether the filing of such 
reports is warranted.
    400. We also agree with Pacific Telesis that restrictions on 
warehousing of space by interconnectors are appropriate. Because 
collocation space on incumbent LEC premises may be limited, inefficient 
use of space by one competitive entrant could deprive another entrant 
of the opportunity to collocate facilities or expand existing space. In 
the Expanded Interconnection proceeding, we allowed ``reasonable 
restrictions on warehousing of space,'' and will adopt this provision 
for purposes of section 251. As discussed below, we also adopt measures 
to ensure that incumbent LECs themselves do not unreasonably 
``warehouse'' space, although we do permit them to reserve a limited 
amount of space for specific future uses. Incumbent LECs, however, are 
not permitted to set maximum space limitations without demonstrating 
that space constraints make such restrictions necessary, as such 
maximum limits could constrain a collocator's ability to provide 
service efficiently.
    401. We also address the impact on small incumbent LECs. For 
example, GVNW argues that we should require collocation in rural areas 
only where there is space available. We have considered the impact of 
our rules in this section on small incumbent LECs and do not require 
physical collocation at any point where there is insufficient space 
available. We decline, however, to adopt rules regarding space 
availability that apply differently to small, rural carriers because 
the rules we here adopt are sufficiently flexible. We also note, 
however, that section 251(f) of the 1996 Act provides relief to certain 
small LECs from our regulations implementing section 251.
f. Leasing Transport Facilities
(1) Background
    402. Our Expanded Interconnection rules require LECs to provide 
collocation for the purpose of allowing collocators to terminate their 
own transmission facilities for special access or switched transport 
service. We did not require that collocation be made available for 
other purposes, for example, when the interconnecting party wished only 
to connect incumbent LEC transmission facilities to collocated 
equipment. We sought comment in the NPRM on whether we should modify

[[Page 45538]]

the standards of the Expanded Interconnection proceeding in light of 
the new statutory requirements and disputes that have arisen in the 
investigations regarding the incumbent LECs' physical and virtual 
collocation tariffs.
(2) Discussion
    403. Although in Expanded Interconnection the Commission required 
that interested parties interconnect collocated equipment with their 
own transmission facilities, we conclude that it would be inconsistent 
with the provisions of the 1996 Act to adopt that requirement under 
section 251. Rather, we conclude that a competitive entrant should not 
be required to bring transmission facilities to LEC premises in which 
it seeks to collocate facilities. Entrants should instead be permitted 
to collocate and connect equipment to unbundled network transmission 
elements obtained from the incumbent LEC. The purpose of the Expanded 
Interconnection requirement was to foster competition in the market for 
interstate switched and special access transmission facilities. The 
purposes of section 251 are broader. Section 251(c)(3) requires that 
competitive entrants be given access to unbundled elements and that 
they be permitted to combine such elements. Prohibiting competitors 
from connecting unbundled network elements to their collocated 
equipment would appear contrary to the provisions of section 251(c)(3).
    404. Finally, we find that Bell Atlantic's opposition to this 
requirement is without merit. Bell Atlantic argues that collocators 
should be required to provide their own transmission facilities because 
otherwise new entrants could compete without providing any of their own 
facilities. Section 251(c)(3) specifically states that unbundled 
elements are to be provided in a manner that allows requesting carriers 
to combine elements in order to provide telecommunications service. As 
stated above, requiring collocators to supply their own transmission 
facilities would amount to a prohibition on connecting unbundled 
transmission facilities to other unbundled elements connected to 
equipment in the collocation space. Although such interconnection 
arrangements were not required by our Expanded Interconnection 
requirements, we conclude that they are required by section 251 when 
collocated equipment is used to achieve interconnection or access to 
unbundled network elements.
g. Co-Carrier Cross-Connect
(1) Background
    405. In the most common collocation configuration under existing 
requirements, the designated physical collocation space of several 
competitive entrants is located close together within the LEC premises. 
Since carriers connect to the collocation space via high-capacity 
lines, different competitive entrants seeking to interconnect with each 
other may find connecting between their respective collocation spaces 
on the LEC premises the most efficient means of interconnecting with 
each other. We sought comment in the NPRM on whether we should adopt 
any requirements in addition to those adopted in the Expanded 
Interconnection proceeding in order to fulfill the mandate of the 1996 
Act.
(2) Discussion
    406. We believe that it serves the public interest and is 
consistent with the policy goals of section 251 to require that 
incumbents permit two or more collocators to interconnect their 
networks at the incumbent's premises. Parties opposed to this proposal 
have offered no legitimate objection to such interconnection. Allowing 
incumbent LECs to prohibit collocating carriers from interconnecting 
their collocated equipment would require them to interconnect 
collocated facilities by routing transmission facilities outside of the 
LECs' premises. We find that such a policy would needlessly burden 
collocating carriers. To the extent equipment is collocated for the 
purposes expressly permitted under section 251(c)(6), the statute does 
not bar us from requiring that incumbent LECs allow connection of such 
equipment to other collocating carriers located nearby. We find that 
requiring LECs to allow such interconnection of collocated equipment 
will foster competition by promoting efficient operation. It is also 
unlikely to have a significant effect on space availability. We find 
authority for such a requirement in section 251(c)(6), which requires 
that collocation be provided on ``terms and conditions that are just, 
reasonable, and nondiscriminatory'' and in section 4(i), which permits 
the Commission to ``perform any and all acts, make such rules and 
regulations, and issue such orders, not inconsistent with this Act, as 
may be necessary in the execution of its functions.'' We therefore will 
require that incumbent LECs allow collocating telecommunications 
carriers to connect collocated equipment to such equipment of other 
carriers within the same LEC premises so long as the collocated 
equipment is used for interconnection with the incumbent LEC or access 
to the LEC's unbundled network elements.
    407. We clarify that we here require incumbent LECs to provide the 
connection between the equipment in the collocated spaces of two or 
more collocating telecommunications carriers unless they permit the 
collocating parties to provide this connection for themselves. We do 
not require incumbent LECs to allow placement of connecting 
transmission facilities owned by competitors within the incumbent LEC 
premises anywhere outside of the actual physical collocation space.
h. Security Arrangements
(1) Background
    408. Under our Expanded Interconnection requirements, incumbent 
LECs typically require that physically collocated equipment be placed 
inside a collocation cage within the incumbent LEC facility. Such cages 
are intended to separate physically the competitors' facilities from 
those of the incumbent and to prevent access by unauthorized personnel 
to any parties' equipment. Such cages frequently add considerably to 
the cost of establishing physical collocation at a particular LEC 
premises and could constitute a barrier to entry in certain 
circumstances.
(2) Discussion
    409. Based on the comments in this proceeding and our previous 
experience with physical collocation in the Expanded Interconnection 
docket, we will continue to permit LECs to require reasonable security 
arrangements to separate an entrant's collocation space from the 
incumbent LEC's facilities. The physical security arrangements around 
the collocation space protect both the LEC's and competitor's equipment 
from interference by unauthorized parties. We reject the suggestion of 
ALTS and MCI that security measures be provided only at the request of 
the entrant since LECs have legitimate security concerns about having 
competitors' personnel on their premises as well. We conclude that the 
physical separation provided by the collocation cage adequately 
addresses these concerns. At the same time, we recognize that the 
construction costs of physical security arrangements could serve as a 
significant barrier to entry, particularly for smaller competitors. We 
also conclude that LECs have both an incentive and the capability to 
impose higher construction costs than the new

[[Page 45539]]

entrant might need to incur. We therefore conclude that collocating 
parties should have the right to subcontract the construction of the 
physical collocation arrangements with contractors approved by the 
incumbent LEC. Incumbent LECs shall not unreasonably withhold such 
approval of contractors. Approval by incumbent LECs of such contractors 
should be based on the same criteria as such LECs use for approving 
contractors for their own purposes. We decline, however, to require 
that competitive entrants' personnel be subject to minimum training and 
proficiency requirements as suggested by GVNW. We find that such 
concerns are better resolved through negotiation and arbitration.
i. Allowing Virtual Collocation in Lieu of Physical
(1) Background
    410. Section 251(c)(6) requires that incumbent LECs provide 
physical collocation unless the carrier ``demonstrates to the state 
commission that physical collocation is not practical for technical 
reasons or because of space limitations * * *.'' In the NPRM, we sought 
comment on whether the Commission should establish guidelines for 
states to apply when determining whether physical collocation is not 
practical for ``technical reasons or because of space limitations.''
(2) Discussion
    411. Section 251(c)(6) clearly contemplates the provision of 
virtual collocation when physical collocation is not practical for 
technical reasons or because of space limitations. Section 251(c)(6) 
requires the incumbent LEC to demonstrate to the state commission's 
satisfaction that there are space limitations on the LEC premises or 
that technical considerations make collocation impractical. Because the 
space limitations and technical practicality issues will vary 
considerably depending on the location at which competitor equipment is 
to be collocated, we find that these issues are best handled on a case-
by-case basis, as they were under our Expanded Interconnection 
requirements. In light of our experience in the Expanded 
Interconnection proceeding, we require that incumbent LECs provide the 
state commission with detailed floor plans or diagrams of any premises 
where the incumbent alleges that there are space constraints. 
Submission of floor plans will enable state commissions to evaluate 
whether a refusal to allow physical collocation on the grounds of space 
constraints is justified. We also find that the approach detailed by 
AT&T in its July 12 Ex Parte submission to be useful and believe that 
state commissions may find it a valuable guide. AT&T describes a 
detailed proposed showing that would be required of an incumbent LEC 
that claims physical collocation is not practical because of space 
exhaustion. The proposed showing would require the specific 
identification of the space on incumbent LEC premises that is used for 
various purposes, as well as specific plans for rearrangement/expansion 
and identification of steps taken to avoid exhaustion.
    412. Although section 251(c)(6) provides that incumbent LECs are 
not required to provide physical collocation where impractical for 
technical reasons or because of space limitations, our experience in 
the Expanded Interconnection proceeding has not demonstrated that 
technical reasons, apart from those related to space availability, are 
a significant impediment to physical collocation. We therefore decline 
to adopt any rules for determining when physical collocation should be 
deemed impractical for technical reasons.
    413. Incumbent LECs are allowed to retain a limited amount of floor 
space for defined future uses. Allowing competitive entrants to claim 
space that incumbent LECs had specifically planned to use could prevent 
incumbent LECs from serving their customers effectively. Incumbent LECs 
may not, however, reserve space for future use on terms more favorable 
than those that apply to other telecommunications carriers seeking to 
hold collocation space for their own future use.
    414. We decline to adopt AT&T's suggestion that incumbent LECs 
should be required to lease additional space or provide trunking at no 
cost where they have insufficient space for physical collocation. In 
light of the availability of substitute virtual collocation 
arrangements, we find that requiring the type of ``substitute'' for 
physical collocation as advocated by AT&T is unnecessary. We similarly 
reject Time Warner's suggestion that incumbent LECs supply a 
``substitute'' for physical collocation at cost, except to the extent 
we require virtual collocation. On the other hand, we will require 
incumbent LECs with limited space availability to take into account the 
demands of interconnectors when planning renovations and leasing or 
constructing new premises, as we have in the Expanded Interconnection 
proceeding.
    415. Incumbent LECs are not required to provide collocation at 
locations where it is not technically feasible to provide virtual 
collocation. Although space constraints are a concern normally 
associated with physical collocation, given our broad reading of the 
term ``premises,'' we find that space constraints could preclude 
virtual collocation at certain LEC premises as well. State commissions 
will decide whether virtual collocation is technically feasible at a 
given point. We do, however, require that incumbent LECs relinquish any 
space held for future use before denying virtual collocation due to a 
lack of space unless the incumbent can prove to a state commission that 
virtual collocation at that point is not technically feasible. 
Moreover, when virtual collocation is not feasible, we require that 
incumbent LECs provide other forms of interconnection and access to 
unbundled network elements to the extent technically feasible.
    416. Finally, we decline to require that incumbent LECs provide 
virtual collocation that is equal in all functional aspects to physical 
collocation. Our Expanded Interconnection rules required a variety of 
standards for the virtual collocation and have been largely successful. 
In addition, Congress was aware of the differences between virtual and 
physical collocation when it adopted section 251(c)(6), and this 
section does not specify any requirements for virtual collocation. As 
discussed above, we adopt the Expanded Interconnection requirements for 
virtual collocation under section 251. We find, however, that a 
standard simply requiring equality in all functional aspects could be 
difficult to administrate and could lead to substantial disputes. We 
also decline to adopt the suggestion that we require LECs to offer 
virtual collocation under the ``$1 sale and repurchase option.'' This 
configuration is described as involving ``the acquisition by the 
interconnectors of the equipment to be dedicated for interconnectors' 
use on the LEC premises and the sale of that equipment to the LECs for 
a nominal $1 sum while maintaining a repurchase option.'' We do not 
find evidence that such a specific requirement is necessary at this 
time. We reserve the right to revisit these issues in the future, 
however, if we perceive that smaller entities would be disadvantaged by 
our existing standards.
2. Legal Issues
a. Relationship Between Expanded Interconnection Tariffs and Section 
251
(1) Background
    417. The enactment of sections 251 and 252 raises the question of 
whether,

[[Page 45540]]

and to what extent, the interconnection, access to unbundled network 
element, and collocation requirements set forth in those sections, and 
the delegation of specific rate-setting authority to the states under 
section 252(d)(1), as a matter of law supplant our section 201 Expanded 
Interconnection requirements. We tentatively concluded in the NPRM that 
our existing Expanded Interconnection policies for interstate special 
access and switched transport should continue to apply.
(2) Discussion
    418. Our Expanded Interconnection rules require the largest 
incumbent LECs to file tariffs with the Commission to offer collocation 
to parties that wish to terminate interstate special access and 
switched transport transmission facilities. Section 252 of the 1996 
Act, on the other hand, provides for interconnection arrangements 
rather than tariffs, for review and approval of such agreements by 
state commissions rather than the FCC, and for public filing of such 
agreements. Section 252 procedures, however, apply only to ``request[s] 
for interconnection, services, or network elements pursuant to section 
251.'' Such procedures do not, by their terms, apply to requests for 
service under section 201. Moreover, section 251(i) expressly provides 
that ``[n]othing in this section shall be construed to limit or 
otherwise affect the Commission's authority under section 201,'' which 
provided the statutory basis for our Expanded Interconnection rules. 
Thus, we find that the 1996 Act, as a matter of law, does not displace 
our Expanded Interconnection requirements, and, in fact, grants 
discretion to the FCC to preserve our existing rules and tariffing 
requirements to the extent they are consistent with the Communications 
Act.
    419. We further conclude that it would make little sense to find 
that sections 251 and 252 supersede our Expanded Interconnection rules, 
because the two sets of requirements are not coextensive. For example, 
our Expanded Interconnection rules encompass collocation for interstate 
purposes for all parties, including non-carrier end users, that seek to 
terminate transmission facilities at LEC central offices. In 
comparison, section 251 requires collocation only for ``any requesting 
telecommunications carrier.'' Certain competing carriers--and non-
carrier customers not covered by section 251--may prefer to take 
interstate expanded interconnection service under general interstate 
tariff schedules. We find that it would be unnecessarily disruptive to 
eliminate that possibility at this time. We also conclude that 
permitting requesting carriers to seek interconnection pursuant to our 
Expanded Interconnection rules as well as section 251 is consistent 
with the goals of the 1996 Act to permit competitive entry through a 
variety of entry strategies. Thus, a requesting carrier would have the 
choice of negotiating an interconnection agreement pursuant to sections 
251 and 252 or of taking tariffed interstate service under our Expanded 
Interconnection rules.
    420. Finally, we expect that, over time, sections 251 and 252 and 
our implementing rules may replace our Expanded Interconnection rules 
as the primary regulations governing interconnection for carriers. We 
note that section 251 is broader than our Expanded Interconnection 
requirements in certain respects. For example, section 251 requires 
incumbent LECs to offer collocation for purposes of accessing unbundled 
network elements, whereas our Expanded Interconnection rules require 
collocation only for the provision of interstate special access and 
switched transport. In addition, section 251(c)(6) requires incumbents 
to offer physical collocation subject to certain exceptions, whereas 
our existing Expanded Interconnection rules only require carriers to 
offer virtual collocation, although they may choose to offer physical 
collocation under Title II regulation in lieu of virtual collocation. 
In the future, we may review the need for a separate set of Expanded 
Interconnection requirements and revise our requirements if necessary. 
We believe that this approach is consistent with Congress' 
determination that the need for federal regulations will likely 
decrease as the provisions of the 1996 Act take effect and competition 
develops in the local exchange and exchange access markets.
b. Takings Issues
(1) Background
    421. In Bell Atlantic v. FCC, the U.S. Court of Appeals for the DC 
Circuit found that the Commission lacked authority under the 
Communications Act to impose physical collocation on the LECs. The 
court found that this requirement implicated the Fifth Amendment 
takings clause. See Bell Atlantic v. FCC, 24 F.3d 1441 (DC Cir. 1994). 
On remand, the Commission required LECs to provide virtual collocation. 
In Pacific Bell v. FCC, 81 F.3d 1147 (DC Cir. 1996), several LECs 
challenged the Commission's virtual collocation rules on essentially 
identical grounds, claiming that the virtual collocation rules also 
constituted an unauthorized taking. The court did not reach the merits 
of these claims. Instead, addressing the scope of section 251 
immediately following enactment and before the FCC had yet exercised 
its interpretive authority with respect to the provision, the court 
stated that regulations enacted to implement the 1996 Act would render 
moot questions regarding the future effect of the virtual collocation 
order under review. The court did not vacate the order, but remanded to 
the Commission the issues presented in that case.
(2) Discussion
    422. We conclude that the ruling in Bell Atlantic does not preclude 
the rules we are adopting in this proceeding. The court in Bell 
Atlantic did not hold that an agency may never ``take'' property; the 
court acknowledged that, as a constitutional matter, takings are 
unlawful only if they are not accompanied by ``just compensation.'' 
Instead, the court simply said that the Communications Act of 1934 
should not be construed to permit the FCC to take LEC property without 
express authorization. Because the court concluded that mandatory 
physical collocation would likely constitute a taking, and that section 
201 of the Act did not expressly authorize physical collocation, the 
court held that the Commission was without authority under section 201 
to impose physical collocation requirements on LECs. The Commission 
maintains the position, however, that mandatory physical collocation 
should not properly be seen to create a takings issue. See Remand 
Order, 9 FCC Rcd at 5169.
    423. The question of statutory authority to impose (physical or 
virtual) collocation obligations on incumbent LECs largely evaporates 
in the context of the 1996 Act. New section 251(c)(6) expressly 
requires incumbent LECs to provide physical collocation, absent space 
or technical limitations. Where such limitations exist, the statute 
expressly requires virtual collocation. Thus, under the court's 
analysis in Bell Atlantic, there is no warrant for a narrowing 
construction of section 251 that would deny us the authority to require 
either form of collocation. Moreover, for the reasons stated in the 
Virtual Collocation Order, we continue to believe that virtual 
collocation, as we have defined it, is not a taking, and that our 
authority to order such collocation (under either section 251 or 
section 201) is not subject to the strict construction canon announced 
in Bell Atlantic.
    424. Given that we now have express statutory authority to order 
physical and

[[Page 45541]]

virtual collocation pursuant to section 251, any remaining takings-
related issue necessarily is limited to the question of just 
compensation. As discussed in Section VII.B.2.a.(3).(c), below, we find 
that the ratemaking methodology we are adopting to implement the 
collocation obligations under section 251(c) is consistent with 
congressional intent and fully satisfies the just compensation 
standard. There is, therefore, no merit to the LECs' Fifth Amendment-
based claims.

VII. Pricing of Interconnection and Unbundled Elements

A. Overview

    425. The prices of interconnection and unbundled elements, along 
with prices of resale and transport and termination, are critical terms 
and conditions of any interconnection agreement. If carriers can agree 
on such prices voluntarily without government intervention, these 
agreements will be submitted directly to the states for approval under 
section 252. To the extent that the carriers, in voluntary 
negotiations, cannot determine the prices, state commissions will have 
to set those prices. The price levels set by state commissions will 
determine whether the 1996 Act is implemented in a manner that is pro-
competitor and favors one party (whether favoring incumbents or 
entrants) or, as we believe Congress intended, pro-competition. As 
discussed more fully in Section II.D. above, it is therefore critical 
to implementing Congress' pro-competitive, de-regulatory national 
policy framework to establish among the states a common, pro-
competition understanding of the pricing standards for interconnection 
and unbundled elements, resale, and transport and termination. While 
such a common interpretation might eventually emerge through judicial 
review of state arbitration decisions, we believe that such a process 
could delay competition for years and require carriers to incur 
substantial legal costs. We therefore conclude that, to expedite the 
development of fair and efficient competition, we must set forth rules 
now establishing this common, pro-competition understanding of the 1996 
Act's pricing standards. Accordingly, the rules we adopt today set 
forth the methodological principles for states to use in setting 
prices. This section addresses interconnection and unbundled elements, 
and subsequent sections address resale and transport and termination, 
respectively.
    426. While every state should, to the maximum extent feasible, 
immediately apply the pricing methodology for interconnection and 
unbundled elements that we set forth below, we recognize that not every 
state will have the resources to implement this pricing methodology 
immediately in the arbitrations that will need to be decided this fall. 
Therefore, so that competition is not impaired in the interim, we 
establish default proxies that a state commission shall use to resolve 
arbitrations in the period before it applies the pricing methodology. 
In most cases, these default proxies for unbundled elements and 
interconnection are ceilings, and states may select lower prices. In 
one instance, the default proxy we establish is a price range. Once a 
state sets prices according to an economic cost study conducted 
pursuant to the cost-based pricing methodology we outline, the defaults 
cease to apply. In setting a rate pursuant to the cost-based pricing 
methodology, and especially when setting a rate above a default proxy 
ceiling or outside the default proxy range, the state must give full 
and fair effect to the economic costing methodology we set forth in 
this Order and must create a factual record, including the cost study, 
sufficient for purposes of review after notice and opportunity for the 
affected parties to participate.
    427. In the following sections, we first set forth generally, based 
on the current record, a cost-based pricing methodology based on 
forward-looking economic costs, which we conclude is the approach for 
setting prices that best furthers the goals of the 1996 Act. In dynamic 
competitive markets, firms take action based not on embedded costs, but 
on the relationship between market-determined prices and forward-
looking economic costs. If market prices exceed forward-looking 
economic costs, new competitors will enter the market. If their 
forward-looking economic costs exceed market prices, new competitors 
will not enter the market and existing competitors may decide to leave. 
Prices for unbundled elements under section 251 must be based on cost 
under the law, and that should be read as requiring that prices be 
based on forward-looking economic costs. New entrants should make their 
decisions whether to purchase unbundled elements or to build their own 
facilities based on the relative economic costs of these options. By 
contrast, because the cost of building an element is based on forward-
looking economic costs, new entrants' investment decisions would be 
distorted if the price of unbundled elements were based on embedded 
costs. In arbitrations of interconnection arrangements, or in 
rulemakings the results of which will be applied in arbitrations, 
states must set prices for interconnection and unbundled network 
elements based on the forward-looking, long-run, incremental cost 
methodology we describe below. Using this methodology, states may not 
set prices lower than the forward-looking incremental costs directly 
attributable to provision of a given element. They may set prices to 
permit recovery of a reasonable share of forward-looking joint and 
common costs of network elements. In the aftermath of the arbitrations 
and relying on the state experience, we will continue to review this 
costing methodology, and issue additional guidance as necessary.
    428. We reject various arguments raised by parties regarding the 
recovery of costs other than forward-looking economic costs in section 
251 (c)(2) and (c)(3) prices, including the possible recovery of: (1) 
embedded or accounting costs in excess of economic costs; (2) incumbent 
LECs' opportunity costs; (3) universal service subsidies; and (4) 
access charges. As discussed in Section VII.B.2.a. below, certain 
portions of access charges may continue to be collected for an interim 
period in addition to section 251(c)(3) prices.
    429. With respect to prices developed under the forward-looking, 
cost-based pricing methodology, we conclude that incumbent LECs' rates 
for interconnection and unbundled elements must recover costs in a 
manner that reflects the way they are incurred. We adopt certain rules 
that states must follow in setting rates in arbitrations. These rules 
are designed to ensure the efficient cost-based rates required by the 
1996 Act.
    430. In the next section of the Order, we establish default proxies 
that states may elect to use prior to utilizing an economic study and 
developing prices using the cost-based pricing methodology. We 
recognize that certain states may find it difficult to apply an 
economic costing methodology within the statutory time frame for 
arbitrating interconnection disputes. We therefore set forth default 
proxies that will be relatively easy to apply on an interim basis to 
interconnection arrangements. We discuss with respect to particular 
unbundled elements the reasonable rate structure for those elements and 
the particular default proxies we are establishing for use pending our 
adoption of a generic forward-looking cost model. Finally, we discuss 
the following additional matters: generic forward-looking costing 
models that we intend to examine further by the first quarter of 1997 
in order to determine

[[Page 45542]]

whether any of those models, with modifications, could serve as better 
default proxies; the future adjustment of rates; the relationship of 
unbundled element prices to retail prices; and the meaning of the 
statutory prohibition against discrimination in sections 251 and 252.
    431. Those states that have already established methodologies for 
setting interconnection and unbundled rates must review those 
methodologies against the rules we are adopting in this Order. To the 
extent a state's methodology is consistent with the approach we set 
forth herein, the state may apply that methodology in any section 252 
arbitration. However, if a state's methodology is not consistent with 
the rules we adopt today, the state must modify its approach. We invite 
any state uncertain about whether its approach complies with this Order 
to seek a declaratory ruling from the Commission.

B. Cost-Based Pricing Methodology

    432. As discussed more fully in Section II.D. above, although the 
states have the crucial role of setting specific rates in arbitrations, 
the Commission must establish a set of national pricing principles in 
order to implement Congress's national policy framework. For the 
reasons set forth in the preceding section and as more fully explained 
below, we are adopting a cost-based methodology for states to follow in 
setting interconnection and unbundled element rates. In setting forth 
the cost-based pricing methodology for interconnection and access to 
unbundled elements, there are three basic sets of questions that must 
be addressed. First, does the 1996 Act require that the same standard 
apply to the pricing of interconnection provided pursuant to section 
251(c)(2), and unbundled elements provided pursuant to section 
251(c)(3)? Second, what is the appropriate methodology for establishing 
the price levels for interconnection and for each unbundled element, 
how should costs be defined, and is the price based on economic costs, 
embedded costs, or other costs? Third, what are the appropriate rate 
structures to be used to set prices designed to recover costs, 
including a reasonable profit? We address each of these questions in 
the following sections.
1. Application of the Statutory Pricing Standard
 a. Background
    433. In the NPRM, we proposed that any pricing principles we adopt 
should be the same for interconnection and unbundled network elements 
because sections 251(c)(2) and (c)(3) and 252(d)(1) use the same 
pricing standard. We invited parties to comment on this issue and to 
justify any proposed distinction in the priority for interconnection 
and unbundled network elements. We also stated our belief that the same 
pricing rules that apply to interconnection and unbundled network 
elements should also apply to collocation under section 251(c)(6) of 
the 1996 Act.
b. Discussion
    434. Sections 251(c)(2) and (c)(3) impose an identical duty on 
incumbent LECs to provide interconnection and access to network 
elements ``on rates, terms, and conditions that are just, reasonable, 
and nondiscriminatory.'' In addition, both interconnection and 
unbundled network elements are made subject to the same pricing 
standard in section 252(d)(1). Based on the plain language of sections 
251(c)(2), (c)(3), and section 252(d)(1), we conclude that Congress 
intended to apply the same pricing rules to interconnection and 
unbundled network elements. The pricing rules we adopt shall, 
therefore, apply to both.
    435. We further conclude that, because section 251(c)(6) requires 
that incumbent LECs provide physical collocation on ``rates, terms, and 
conditions that are just, reasonable, and nondiscriminatory,'' which is 
identical to the standard for interconnection and unbundled elements in 
sections 251(c)(2) and (c)(3), collocation should be subject to the 
same pricing rules. We also note that, because collocation is a method 
of obtaining interconnection and access to unbundled network elements, 
collocation is properly treated under the same pricing rules. This 
legal conclusion that there should be a single set of pricing rules for 
interconnection, unbundled network elements, and collocation provides 
greater consistency and guidance to the industry, regulators, and the 
courts. Moreover, it reduces the regulatory burdens on state 
commissions of developing and applying different pricing rules for 
collocation, interconnection, and unbundled network elements. We note 
that our adoption of this single set of pricing rules should minimize 
regulatory burdens, conflicts, and uncertainties associated with 
multiple, and possibly inconsistent rules, thus facilitating 
competition on a reasonable and efficient basis minimizing the economic 
impact of our rules for all parties, including small entities and small 
incumbent LECs.
2. Rate Levels
a. Pricing Based on Economic Cost
(1) Background
    436. We observed in the NPRM that economists generally agree that 
prices based on forward-looking long-run incremental costs (LRIC) give 
appropriate signals to producers and consumers and ensure efficient 
entry and utilization of the telecommunications infrastructure. We 
noted, however, that there was a lack of general agreement on the 
specifics of methodology for deriving prices based on LRIC or total 
service long-run incremental cost (TSLRIC). We invited parties to 
comment on whether we should require the states to employ a LRIC-based 
pricing methodology and to explain with specificity the costing 
methodology they support. We recognized, however, that prices based on 
LRIC might not permit recovery of forward-looking costs if there were 
significant forward-looking joint and common costs among network 
elements. We sought comment on how, if rates are set above incremental 
cost, to deal with the problems inherent in allocating common costs and 
any other overheads. We observed that, by defining the unbundled 
elements at a sufficiently aggregated level, it may be possible to 
reduce the costs to be allocated as joint and common by identifying a 
substantial portion of costs as incremental to a particular element. To 
the extent that joint and common costs cannot be entirely eliminated, 
we sought comment on various methodologies for assigning them, 
including the use of a fixed allocator or on the basis of inverse 
demand elasticity. We also sought comment on whether, regardless of the 
method of allocating common costs, we should limit rates to levels that 
do not exceed stand-alone costs. Finally, we invited parties to comment 
on whether a LRIC-based methodology would establish a price for 
interconnection and unbundled network elements that includes a 
reasonable profit and thus complies with section 252(d)(1).
    437. A number of states already employ, or have plans to utilize, 
some form of LRIC or TSLRIC methodology in their approach to setting 
prices for unbundled network elements, with several states choosing 
LRIC or TSLRIC as a price floor. For instance, the Connecticut 
Commission adopted a TSLRIC methodology to measure the cost of service 
of SNET, its principal incumbent LEC. Arizona also requires incumbent 
LECs to conduct TSLRIC cost studies to establish the underlying cost

[[Page 45543]]

of unbundled services and facilities. The Ohio Commission has adopted 
Long Run Service Incremental Cost (``LRSIC''), which is closely related 
to TSLRIC. The Missouri and Wyoming Commissions are among a number of 
state commissions that have not yet adopted a pricing methodology, but 
are considering LRIC or TSLRIC. Oklahoma law provides for submission of 
LRIC cost studies and studies identifying a contribution to common 
costs for interconnection of facilities and access to network elements 
to the Oklahoma Commission during an arbitration. A number of states 
have yet to choose a pricing methodology. For instance, the New York 
Commission sets prices on a case-by-case basis. Unbundled element 
prices also exist in several states pursuant to negotiated 
interconnection agreements that have either already been approved by 
state commissions or are under consideration.
    438. Section 252(d)(1) requires, inter alia, that rates for 
interconnection and unbundled network elements be based on ``cost 
(determined without reference to a rate-of-return or other rate-based 
proceeding).'' We tentatively concluded in the NPRM that this language 
precludes states from setting rates by use of traditional cost-of 
service regulation, with its detailed examination of historical carrier 
investment and expenses. Instead, we indicated our belief that the 
statute contemplates the use of other forms of cost-based price 
regulation, such as the setting of prices based on forward-looking 
economic cost methodologies (such as LRIC) that do not involve the use 
of an embedded rate base. We sought comment on whether section 
252(d)(1) forecloses consideration of historical or embedded costs or 
merely prohibits state commissions from conducting a traditional rate-
of-return proceeding to establish prices for interconnection and 
unbundled network elements. Embedded costs are the costs that the 
incumbent LECs carry on their accounting books that reflect historical 
purchase prices, regulatory depreciation rates, system configurations, 
and operating procedures. We invited parties to comment on whether 
incumbent LECs should be permitted to recover some portion of their 
historical or embedded costs over TSLRIC.
    439. In the NPRM, we noted that certain incumbent LECs had 
advocated that interconnection and access to unbundled element prices 
be based on the ``efficient component pricing rule'' (ECPR). Under this 
approach, an incumbent LEC that sells an essential input element, such 
as interconnection, to a competing network would set the price of that 
input element equal to ``the input's direct per-unit incremental costs 
plus the opportunity cost to the input supplier of the sale of a unit 
of input.'' We tentatively concluded in the NPRM that ECPR or 
equivalent methodologies are inconsistent with the section 252(d)(1) 
requirement that rates be based on ``cost,'' and we proposed to 
preclude the states from using this methodology.
    440. Section 254 requires the Commission and the Joint Board 
established thereunder to ensure that ``[a]ll providers of 
telecommunications service * * * make an equitable and 
nondiscriminatory contribution to the preservation and advancement of 
universal service. * * *'' That section further provides that ``[t]here 
should be specific, predictable, and sufficient Federal and State 
mechanisms to preserve and advance universal service.'' The Conference 
Committee also explained that these provisions require any such 
universal service support payment to be, to the extent possible, 
``explicit, rather than implicit as many support mechanisms are 
today.'' In the NPRM, we sought comment on whether ``it would be 
consistent with sections 251(d)(1) and 254 for states to include any 
universal service costs or subsidies in the rates they set for 
interconnection, collocation, and unbundled network elements.'' In 
particular, we discussed the ``play or pay'' system adopted by the 
State of New York in which interconnectors that agree to serve all 
customers in their self-defined service areas (``players'') potentially 
pay a substantially lower interconnection rate than those that serve 
only selected customers (``payers'') and are, therefore, liable to pay 
additional contribution charges. We noted that the statutory schedule 
for the completion of the universal service reform proceeding (15 
months from the enactment of the 1996 Act) is different from that for 
this proceeding (6 months from the date of enactment of the 1996 Act). 
We asked whether the ability of states to take universal service 
support into account differs pending completion of the section 254 
Joint Board proceeding or state universal service proceedings, pursuant 
to section 254(f), during any transition period that may be established 
in the section 254 proceeding or thereafter.
(2) Discussion
    441. Overview. Having concluded in Section II.D., above, that we 
have the requisite legal authority and that we should establish 
national pricing rules, we conclude here that prices for 
interconnection and unbundled elements pursuant to sections 251(c)(2), 
251(c)(3), and 252(d)(1), should be set at forward-looking long-run 
economic cost. In practice, this will mean that prices are based on the 
TSLRIC of the network element, which we will call Total Element Long 
Run Incremental Cost (TELRIC), and will include a reasonable allocation 
of forward-looking joint and common costs. The 1996 Act encourages 
competition by removing barriers to entry and providing an opportunity 
for potential new entrants to purchase unbundled incumbent LEC network 
elements to compete efficiently to provide local exchange services. We 
believe that the prices that potential entrants pay for these elements 
should reflect forward-looking economic costs in order to encourage 
efficient levels of investment and entry.
    442. In this section, we describe this forward-looking, cost-based 
pricing standard in detail. First, we define the terms we are using, 
explain how the methodology we are adopting differs from other costing 
approaches, and describe how it should be implemented. In particular, 
we explain that the price of a network element should include the 
forward-looking costs that can be attributed directly to the provision 
of services using that element, which includes a reasonable return on 
investment (i.e., ``profit''), plus a reasonable share of the forward-
looking joint and common costs. Second, we address potential cost 
measures that must not be included in a TELRIC analysis, such as 
embedded (or historical) costs, opportunity costs, or universal service 
subsidies. Finally, we refute arguments that this methodology would 
violate the incumbent LECs' rights under the Fifth Amendment.
(a) Total Element Long-Run Incremental Cost
    443. Definitions of Terms. In light of the various possible 
definitions of a number of the critical economic terms used in this 
context, we begin by defining terms as we use them in this Order. 
Specifically, we provide definitions for the following terms: 
``incremental cost;'' ``economic cost;'' ``embedded or accounting 
cost;'' ``joint cost;'' ``common cost;'' ``long-run incremental cost;'' 
``total service long-run incremental cost;'' ``total element long-run 
incremental cost.'' In addition to defining these terms, we explain the 
economic rationale behind the concepts.
    444. Incremental costs are the additional costs (usually expressed 
as a cost per unit) that a firm will incur as a result of expanding the 
output of a good or service by producing an additional quantity of the 
good or

[[Page 45544]]

service. Incremental costs are forward-looking in the sense that these 
costs are incurred as the output level changes by a given increment. 
The costs that are considered incremental will vary greatly depending 
on the size of the increment. For example, the incremental cost of 
carrying an additional call from a residence that is already connected 
to the network to its end office is virtually zero. The incremental 
cost of connecting a new residence to its end office, however, is the 
cost of the loop. Forward-looking incremental costs, plus a portion of 
the forward-looking joint and common costs, are sometimes referred to 
as ``economic costs.'' Embedded or accounting costs are costs that 
firms incurred in the past for providing a good or service and are 
recorded as past operating expenses and depreciation. Due to changes in 
input prices and technologies, incremental costs may differ from 
embedded costs of that same increment. In competitive markets, the 
price of a good or service will tend towards its long-run incremental 
cost.
    445. Certain types of costs arise from the production of multiple 
products or services. We use the term ``joint costs'' to refer to costs 
incurred when two or more outputs are produced in fixed proportion by 
the same production process (i.e., when one product is produced, a 
second product is generated by the same production process at no 
additional cost). The term ``common costs'' refers to costs that are 
incurred in connection with the production of multiple products or 
services, and remains unchanged as the relative proportion of those 
products or services varies (e.g., the salaries of corporate managers). 
Such costs may be common to all services provided by the firm or common 
to only a subset of those services or elements. If a cost is common 
with respect to a subset of services or elements, for example, a firm 
avoids that cost only by not providing each and every service or 
element in the subset. For the purpose of our discussion, we refer to 
joint and common costs as simply common costs unless the distinction is 
relevant in a particular context.
    446. The term ``long-run,'' in the context of ``long run 
incremental cost,'' refers to a period long enough so that all of a 
firm's costs become variable or avoidable. The term ``total service,'' 
in the context of TSLRIC, indicates that the relevant increment is the 
entire quantity of the service that a firm produces, rather than just a 
marginal increment over and above a given level of production. 
Depending on what services are the subject of a study, TSLRIC may be 
for a single service or a class of similar services. TSLRIC includes 
the incremental costs of dedicated facilities and operations that are 
used by only the service in question. TSLRIC also includes the 
incremental costs of shared facilities and operations that are used by 
that service as well as other services.
    447. While we are adopting a version of the methodology commonly 
referred to as TSLRIC as the basis for pricing interconnection and 
unbundled elements, we are coining the term ``total element long-run 
incremental cost'' (TELRIC) to describe our version of this 
methodology. The incumbent LEC offerings to be priced using this 
methodology generally will be ``network elements,'' rather than 
``telecommunications services,'' as defined by the 1996 Act. More 
fundamentally, we believe that TELRIC-based pricing of discrete network 
elements or facilities, such as local loops and switching, is likely to 
be much more economically rational than TSLRIC-based pricing of 
conventional services, such as interstate access service and local 
residential or business exchange service. As discussed in greater 
detail below, separate telecommunications services are typically 
provided over shared network facilities, the costs of which may be 
joint or common with respect to some services. The costs of local loops 
and their associated line cards in local switches, for example, are 
common with respect to interstate access service and local exchange 
service, because once these facilities are installed to provide one 
service they are able to provide the other at no additional cost. By 
contrast, the network elements, as we have defined them, largely 
correspond to distinct network facilities. Therefore, the amount of 
joint and common costs that must be allocated among separate offerings 
is likely to be much smaller using a TELRIC methodology rather than a 
TSLRIC approach that measures the costs of conventional services. 
Because it is difficult for regulators to determine an economically 
optimal allocation of any such joint and common costs, we believe that 
pricing elements, defined as facilities with associated features and 
functions, is more reliable from the standpoint of economic efficiency 
than pricing services that use shared network facilities.
    448. Description of TELRIC-Based Pricing Methodology. Adopting a 
pricing methodology based on forward-looking economic costs best 
replicates, to the extent possible, the conditions of a competitive 
market. In addition, a forward-looking cost methodology reduces the 
ability of an incumbent LEC to engage in anti-competitive behavior. 
Congress recognized in the 1996 Act that access to the incumbent LECs' 
bottleneck facilities is critical to making meaningful competition 
possible. As a result of the availability to competitors of the 
incumbent LEC's unbundled elements at their economic cost, consumers 
will be able to reap the benefits of the incumbent LECs' economies of 
scale and scope, as well as the benefits of competition. Because a 
pricing methodology based on forward-looking costs simulates the 
conditions in a competitive marketplace, it allows the requesting 
carrier to produce efficiently and to compete effectively, which should 
drive retail prices to their competitive levels. We believe that our 
adoption of a forward-looking cost-based pricing methodology should 
facilitate competition on a reasonable and efficient basis by all firms 
in the industry by establishing prices for interconnection and 
unbundled elements based on costs similar to those incurred by the 
incumbents, which may be expected to reduce the regulatory burdens and 
economic impact of our decision for many parties, including both small 
entities seeking to enter the local exchange markets and small 
incumbent LECs.
    449. We note that incumbent LECs have greater access to the cost 
information necessary to calculate the incremental cost of the 
unbundled elements of the network. Given this asymmetric access to cost 
data, we find that incumbent LECs must prove to the state commission 
the nature and magnitude of any forward-looking cost that it seeks to 
recover in the prices of interconnection and unbundled network 
elements.
    450. Some parties express concern that the information required to 
compute prices based on forward-looking costs is inherently so 
hypothetical as to be of little or no practical value. Based on the 
record before us, we disagree. A number of states, which ultimately 
will have to review forward-looking cost studies in carrying out their 
duties under section 252, either have already implemented forward-
looking, incremental costing methodologies to set prices for 
interconnection and unbundled network elements or support the use of 
such an approach. While these states have applied somewhat different 
definitions of, and approaches to setting prices developed on, an 
incremental cost methodology, the record demonstrates that such 
approaches are practical and implementable.

[[Page 45545]]

    451. We conclude that, under a TELRIC methodology, incumbent LECs' 
prices for interconnection and unbundled network elements shall recover 
the forward-looking costs directly attributable to the specified 
element, as well as a reasonable allocation of forward-looking common 
costs. Per-unit costs shall be derived from total costs using 
reasonably accurate ``fill factors'' (estimates of the proportion of a 
facility that will be ``filled'' with network usage); that is, the per-
unit costs associated with a particular element must be derived by 
dividing the total cost associated with the element by a reasonable 
projection of the actual total usage of the element. Directly 
attributable forward-looking costs include the incremental costs of 
facilities and operations that are dedicated to the element. Such costs 
typically include the investment costs and expenses related to primary 
plant used to provide that element. Directly attributable forward-
looking costs also include the incremental costs of shared facilities 
and operations. Those costs shall be attributed to specific elements to 
the greatest extent possible. Telephone Company-Cable Television Cross-
Ownership Rules, Memorandum Opinion and Order on Reconsideration and 
Third Further Notice of Proposed Rulemaking, 59 FR 63909 (December 12, 
1994). For example, the costs of conduits shared by both transport and 
local loops, and the costs of central office facilities shared by both 
local switching and tandem switching, shall be attributed to specific 
elements in reasonable proportions. More broadly, certain shared costs 
that have conventionally been treated as common costs (or overheads) 
shall be attributed directly to the individual elements to the greatest 
extent possible. The forward-looking costs directly attributable to 
local loops, for example, shall include not only the cost of the 
installed copper wire and telephone poles but also the cost of payroll 
and other back office operations relating to the line technicians, in 
addition to other attributable costs.
    452. Forward-looking cost methodologies, like TELRIC, are intended 
to consider the costs that a carrier would incur in the future. Thus, a 
question arises whether costs should be computed based on the least-
cost, most efficient network configuration and technology currently 
available, or whether forward-looking cost should be computed based on 
incumbent LECs' existing network infrastructures, taking into account 
changes in depreciation and inflation. The record indicates three 
general approaches to this issue. Under the first approach, the 
forward-looking economic cost for interconnection and unbundled 
elements would be based on the most efficient network architecture, 
sizing, technology, and operating decisions that are operationally 
feasible and currently available to the industry. Prices based on the 
least-cost, most efficient network design and technology replicate 
conditions in a highly competitive marketplace by not basing prices on 
existing network design and investments unless they represent the 
least-cost systems available for purchase. This approach, however, may 
discourage facilities-based competition by new entrants because new 
entrants can use the incumbent LEC's existing network based on the cost 
of a hypothetical least-cost, most efficient network.
    453. Under the second approach, the cost of interconnection and 
unbundled network elements would be based on existing network design 
and technology that are currently in operation. Because this approach 
is not based on a hypothetical network in the short run, incumbent LECs 
could recover costs based on their existing operations, and prices for 
interconnection and unbundled elements that reflect inefficient or 
obsolete network design and technology. This is essentially an embedded 
cost methodology.
    454. Under the third approach, prices for interconnection and 
access to unbundled elements would be developed from a forward-looking 
economic cost methodology based on the most efficient technology 
deployed in the incumbent LEC's current wire center locations. This 
approach mitigates incumbent LECs' concerns that a forward-looking 
pricing methodology ignores existing network design, while basing 
prices on efficient, new technology that is compatible with the 
existing infrastructure. This benchmark of forward-looking cost and 
existing network design most closely represents the incremental costs 
that incumbents actually expect to incur in making network elements 
available to new entrants. Moreover, this approach encourages 
facilities-based competition to the extent that new entrants, by 
designing more efficient network configurations, are able to provide 
the service at a lower cost than the incumbent LEC. We, therefore, 
conclude that the forward-looking pricing methodology for 
interconnection and unbundled network elements should be based on costs 
that assume that wire centers will be placed at the incumbent LEC's 
current wire center locations, but that the reconstructed local network 
will employ the most efficient technology for reasonably foreseeable 
capacity requirements.
    455. We agree with USTA, Bell Atlantic, and BellSouth that, as a 
theoretical matter, the combination of significant sunk investment, 
declining technology costs, and competitive entry may increase the 
depreciation costs and cost of capital of incumbent LECs. We do not 
agree, however, that TSLRIC does not or cannot account for risks that 
an incumbent LEC incurs because it has sunk investments in facilities. 
On the contrary, properly designed depreciation schedules should 
account for expected declines in the value of capital goods. Both AT&T 
and MCI appear to agree with this proposition. For example, AT&T 
states, ``[i]n order to estimate TSLRIC, one must perform a discounted 
cash flow analysis of the future costs associated with the decision to 
invest. * * * One-time costs associated with the acquisition of capital 
goods are amortized over the economic life of the assets using the user 
cost of capital * * *, which requires accounting for both expected 
capital good price changes and economic depreciation.'' Moreover, we 
are confident that parties to an arbitration with TELRIC studies can 
propose specific depreciation rate adjustments that reflect expected 
asset values over time.
    456. As noted, we also agree that, as a matter of theory, an 
increase in risk due to entry into the market for local exchange 
service can increase a LEC's cost of capital. We believe that this 
increased risk can be partially mitigated, however, by offering term 
discounts, since long-term contracts can minimize the risk of stranded 
investment. In addition, growth in overall market demand can increase 
the potential of the incumbent LEC to use some of its displaced 
facilities for other purposes. Overall, we think that these factors can 
and should be captured in any LRIC model and therefore we do not agree 
that this requires a departure from the general principle of forward-
looking cost-based pricing for network elements.
    457. We are not persuaded by USTA's argument that forward looking 
methodologies fail to adjust the cost of capital to reflect the risks 
associated with irreversible investments and that they are ``biased 
downward by a factor of three.'' First, USTA's argument unrealistically 
assumes that competitive entry would be instantaneous. The more 
reasonable assumption of entry occurring over time will reduce the 
costs associated with sunk investment. Second, we find it unlikely that 
investment in communications

[[Page 45546]]

equipment is entirely irreversible or that such equipment would become 
valueless once facilities-based competition begins. In a growing 
market, there most likely would be demand for at least some embedded 
telecommunications equipment, which would therefore retain its value. 
Third, contractual arrangements between the new entrant and the 
incumbent that specifically address USTA's concerns and protect 
incumbent's investments during transition can be established.
    458. Finally we are not persuaded that the use by firms of hurdle 
rates that exceed the market cost of capital is convincing evidence 
that sunk investments significantly increase a firm's cost of capital. 
An alternative explanation for this phenomenon is that the process that 
firms use to choose among investment projects results in overestimates 
of their returns. Firms therefore use hurdle rates in excess of the 
market cost of capital to account for these overestimates.
    459. Summary of TELRIC Methodology. The following summarizes our 
conclusions regarding setting prices of interconnection and access to 
unbundled network elements based on the TELRIC methodology for such 
elements. The increment that forms the basis for a TELRIC study shall 
be the entire quantity of the network element provided. As we have 
previously stated, all costs associated with providing the element 
shall be included in the incremental cost. Only forward-looking, 
incremental costs shall be included in a TELRIC study. Costs must be 
based on the incumbent LEC's existing wire center locations and most 
efficient technology available.
    460. Any function necessary to produce a network element must have 
an associated cost. The study must explain with specificity why and how 
specific functions are necessary to provide network elements and how 
the associated costs were developed. Only those costs that are incurred 
in the provision of the network elements in the long run shall be 
directly attributable to those elements. Costs must be attributed on a 
cost-causative basis. Costs are causally-related to the network element 
being provided if the costs are incurred as a direct result of 
providing the network elements, or can be avoided, in the long run, 
when the company ceases to provide them. Thus, for example, the 
forward-looking costs of capital (debt and equity) needed to support 
investments required to produce a given element shall be included in 
the forward-looking direct cost of that element. Directly attributable 
costs shall include costs such as certain administrative expenses, 
which have traditionally been viewed as common costs, if these costs 
vary with the provision of network elements. Retailing costs, such as 
marketing or consumer billing costs associated with retail services, 
are not attributable to the production of network elements that are 
offered to interconnecting carriers and must not be included in the 
forward-looking direct cost of an element.
    461. In a TELRIC methodology, the ``long run'' used shall be a 
period long enough that all costs are treated as variable and 
avoidable. This ``long run'' approach ensures that rates recover not 
only the operating costs that vary in the short run, but also fixed 
investment costs that, while not variable in the short term, are 
necessary inputs directly attributable to providing the element.
    462. States may review a TELRIC economic cost study in the context 
of a particular arbitration proceeding, or they may conduct such 
studies in a rulemaking and apply the results in various arbitrations 
involving incumbent LECs. In the latter case, states must replace any 
interim rates set in arbitration proceedings with the permanent rate 
resulting from the separate rulemaking. This permanent rate will take 
effect at or about the time of the conclusion of the separate 
rulemaking and will apply from that time forward.
    463. Forward-Looking Common Costs. Certain common costs are 
incurred in the provision of network elements. As discussed above, some 
of these costs are common to only a subset of the elements or services 
provided by incumbent LECs. Such costs shall be allocated to that 
subset, and should then be allocated among the individual elements or 
services in that subset, to the greatest possible extent. For example, 
shared maintenance facilities and vehicles should be allocated only to 
the elements that benefit from those facilities and vehicles. Common 
costs also include costs incurred by the firm's operations as a whole, 
that are common to all services and elements (e.g., salaries of 
executives involved in overseeing all activities of the business), 
although for the purpose of pricing interconnection and access to 
unbundled elements, which are intermediate products offered to 
competing carriers, the relevant common costs do not include billing, 
marketing, and other costs attributable to the provision of retail 
service. Given these common costs, setting the price of each discrete 
network element based solely on the forward-looking incremental costs 
directly attributable to the production of individual elements will not 
recover the total forward-looking costs of operating the wholesale 
network. Because forward-looking common costs are consistent with our 
forward-looking, economic cost paradigm, a reasonable measure of such 
costs shall be included in the prices for interconnection and access to 
network elements.
    464. The incumbent LECs generally argue that common costs are quite 
significant, while several other parties maintain that these amounts 
are minimal. Because the unbundled network elements correspond, to a 
great extent, to discrete network facilities, and have different 
operating characteristics, we expect that common costs should be 
smaller than the common costs associated with the long-run incremental 
cost of a service. We expect that many facility costs that may be 
common with respect to the individual services provided by the 
facilities can be directly attributed to the facilities when offered as 
unbundled network elements. Moreover, defining the network elements at 
a relatively high level of aggregation, as we have done, should also 
reduce the magnitude of the common costs. A properly conducted TELRIC 
methodology will attribute costs to specific elements to the greatest 
possible extent, which will reduce the common costs. Nevertheless, 
there will remain some common costs that must be allocated among 
network elements and interconnection services. For example, at the sub-
element level of study (e.g., identifying the respective costs of 2-
wire loops, 4-wire loops, ISDN loops, and so on), common costs may be a 
significant proportion of all the costs that must be recovered from 
sub-elements. Given the likely asymmetry of information regarding 
network costs, we conclude that, in the arbitration process, incumbent 
LECs shall have the burden to prove the specific nature and magnitude 
of these forward-looking common costs.
    465. We conclude that forward-looking common costs shall be 
allocated among elements and services in a reasonable manner, 
consistent with the pro-competitive goals of the 1996 Act. One 
reasonable allocation method would be to allocate common costs using a 
fixed allocator, such as a percentage markup over the directly 
attributable forward-looking costs. We conclude that a second 
reasonable allocation method would allocate only a relatively small 
share of common costs to certain critical network elements, such as the 
local loop and collocation, that are most difficult for entrants to 
replicate promptly (i.e., bottleneck facilities). Allocation of common 
costs

[[Page 45547]]

on this basis ensures that the prices of network elements that are 
least likely to be subject to competition are not artificially inflated 
by a large allocation of common costs. On the other hand, certain other 
allocation methods would not be reasonable. For example, we conclude 
that an allocation methodology that relies exclusively on allocating 
common costs in inverse proportion to the sensitivity of demand for 
various network elements and services may not be used. We conclude that 
such an allocation could unreasonably limit the extent of entry into 
local exchange markets by allocating more costs to, and thus raising 
the prices of, the most critical bottleneck inputs, the demand for 
which tends to be relatively inelastic. Such an allocation of these 
costs would undermine the pro-competitive objectives of the 1996 Act.
    466. We believe that our treatment of forward-looking common costs 
will minimize regulatory burdens and economic impact for all parties 
involved in arbitration of agreements for interconnection and access to 
unbundled elements, and will advance the 1996 Act's pro-competitive 
objectives for local exchange and exchange access markets. In our 
decisionmaking, we have considered the economic impact of our rules in 
this section on small incumbent LECs. For example, although opposed to 
the use of a forward-looking, economic cost methodology, small 
incumbent LECs favor the recovery of joint and common costs in the 
event the Commission adopts forward-looking cost methodology. We are 
adopting such an approach. Moreover, the cost-based pricing methodology 
that we are adopting is designed to permit incumbent LECs to recover 
their economic costs of providing interconnection and unbundled 
elements, which may minimize the economic impact of our decisions on 
incumbent LECs, including small incumbent LECs. We also note that 
certain small incumbent LECs are not subject to our rules under section 
251(f)(1) of the 1996 Act, unless otherwise determined by a state 
commission, and certain other small incumbent LECs may seek relief from 
their state commissions from our rules under section 251(f)(2) of the 
1996 Act.
    467. We further conclude that, for the aggregate of all unbundled 
network elements, incumbent LECs must be given a reasonable opportunity 
to recover their forward-looking common costs attributable to operating 
the wholesale network. In no instance should prices exceed the stand-
alone cost for a specific element, and in most cases they should be 
below stand-alone costs. Stand-alone costs are defined as the forward-
looking cost that an efficient entrant would incur in providing a given 
element or any combination of elements. No price higher than stand-
alone cost could be sustained in a market from which entry barriers 
were completely absent. Where there are few common costs, there is 
likely to be only a minimal difference between the forward-looking 
costs that are directly attributable to the particular element, which 
excludes these costs, and stand-alone cost, which includes all of them. 
Network elements should not, however, be priced at levels that would 
enable the incumbent LEC to recover the same common costs multiple 
times from different elements. Any multiple recovery would be 
unreasonable and thus in violation of the statutory standard. Further, 
we note that the sum of the direct costs and the forward-looking common 
costs of all elements will likely differ from the incumbent LEC's 
historical, fully distributed costs.
    468. Reasonable Return on Investment and ``Profit.'' Section 
252(d)(1) states that rates for interconnection and access to unbundled 
elements ``may include a reasonable profit.'' We find that the TELRIC 
pricing methodology we are adopting provides for such a reasonable 
profit and thus no additional profit is justified under the statutory 
language. We note there are two types of profit. First, in plain 
English, profit is defined as ``the excess of returns over expenditure 
in a transaction or a series of transactions.'' This is also known as a 
``normal'' profit, which is the total revenue required to cover all of 
the costs of a firm, including its opportunity costs. Second, there is 
``economic'' profit, which is any return in excess of normal profit. 
Thus, for example, if the normal return in an industry is 10 percent 
and a firm earns a return of 14 percent, the economic profit for that 
firm is 4 percent. Economic is also referred to as ``supranormal'' 
profit. We conclude that the definition of ``normal'' profit is 
embodied in ``reasonable profit'' under Section 252(d)(1).
    469. The concept of normal profit is embodied in forward-looking 
costs because the forward-looking cost of capital, i.e., the cost of 
obtaining debt and equity financing, is one of the forward-looking 
costs of providing the network elements. This forward-looking cost of 
capital is equal to a normal profit. We conclude that allowing greater 
than normal profits would not be ``reasonable'' under sections 251(c) 
and 252(d)(1). Bluefield Water Works & Improvement Co. v. Public 
Service Comm'n of West Virginia, 262 U.S. 679 (1923); Federal Power 
Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944). Thus, contrary to 
the arguments put forth by several incumbent LECs, we find that adding 
an additional measure of profit to the risk-adjusted cost of capital in 
setting the prices for interconnection and access to unbundled elements 
would violate the requirements of sections 251(c) and 252(d)(1) of the 
1996 Act.
    470. Possible accounting losses from the sale of interconnection 
and unbundled network elements using a reasonable forward-looking cost-
based methodology do not necessarily indicate that incumbent LECs are 
being denied a ``reasonable profit'' under the statute. The use of a 
forward-looking, economic, cost-based pricing methodology, including a 
reasonable allocation of legitimate joint and common costs, will permit 
incumbent LECs the opportunity to earn a reasonable return on their 
investment in network elements. Finally, contrary to PacTel's argument, 
and as discussed below in detail, we conclude that our forward-looking 
cost-based pricing methodology is consistent with the Fifth Amendment 
and is not confiscatory.
    471. Based on the current record, we conclude that the currently 
authorized rate of return at the federal or state level is a reasonable 
starting point for TELRIC calculations, and incumbent LECs bear the 
burden of demonstrating with specificity that the business risks that 
they face in providing unbundled network elements and interconnection 
services would justify a different risk-adjusted cost of capital or 
depreciation rate. These elements generally are bottleneck, monopoly 
services that do not now face significant competition. We recognize 
that incumbent LECs are likely to face increased risks given the 
overall increases in competition in this industry, which generally 
might warrant an increased cost of capital, but note that, earlier this 
year, we instituted a preliminary inquiry as to whether the currently 
authorized federal 11.25 percent rate of return is too high given the 
current marketplace cost of equity and debt. On the basis of the 
current record, we decline to engage in a time-consuming examination to 
determine a new rate of return, which may well require a detailed 
proceeding. States may adjust the cost of capital if a party 
demonstrates to a state commission that either a higher or lower level 
of cost of capital is warranted, without that commission conducting a 
``rate-of-return or other rate based proceeding.'' We note that the 
risk-adjusted cost of capital need not be uniform for all

[[Page 45548]]

elements. We intend to re-examine the issue of the appropriate risk-
adjusted cost of capital on an ongoing basis, particularly in light of 
the state commissions' experiences in addressing this issue in specific 
situations.
    472. We disagree with the conclusion that, when there are mostly 
sunk costs, forward-looking economic costs should not be the basis for 
pricing interconnection elements. The TELRIC of an element has three 
components, the operating expenses, the depreciation cost, and the 
appropriate risk-adjusted cost of capital. We conclude that an 
appropriate calculation of TELRIC will include a depreciation rate that 
reflects the true changes in economic value of an asset and a cost of 
capital that appropriately reflects the risks incurred by an investor. 
Thus, even in the presence of sunk costs, TELRIC-based prices are an 
appropriate pricing methodology.
(b) Cost Measures Not Included in Forward-Looking Cost Methodology
    473. Embedded Costs. We read section 252(d)(1)(A)(i) to prohibit 
states from conducting traditional rate-of-return or other rate-based 
proceedings to determine rates for interconnection and access to 
unbundled network elements. We find that the parenthetical, 
``(determined without reference to a rate-of-return or other rate-based 
proceeding),'' does not further define the type of costs that may be 
considered, but rather specifies a type of proceeding that may not be 
employed to determine the cost of interconnection and unbundled network 
elements. The legislative history demonstrates that Congress was eager 
to set in motion expeditiously the development of local competition and 
intended to avoid imposing the costs and administrative burdens 
associated with a traditional rate case. Prior to the joint conference, 
the Senate version of the 1996 Act contained the parenthetical 
language. In addition, the Senate version of the 1996 Act eliminated 
rate-of-return regulation, as did the House version. Conferees removed 
the provisions eliminating rate-of-return regulation, but retained the 
parenthetical.
    474. Section 252(d)(1)(A)(i) does not specify whether historical or 
embedded costs should be considered or whether only forward-looking 
costs should be considered in setting arbitrated rates. We are not 
persuaded by incumbent LEC arguments that prices for interconnection 
and unbundled network elements must or should include any difference 
between the embedded costs they have incurred to provide those elements 
and their current economic costs. Neither a methodology that 
establishes the prices for interconnection and access to network 
elements directly on the costs reflected in the regulated books of 
account, nor a price based on forward looking costs plus an additional 
amount reflecting embedded costs, would be consistent with the approach 
we are adopting. The substantial weight of economic commentary in the 
record suggests that an ``embedded cost''-based pricing methodology 
would be pro-competitor--in this case the incumbent LEC--rather than 
pro-competition. We therefore decline to adopt embedded costs as the 
appropriate basis of setting prices for interconnection and access to 
unbundled elements. Rather, we reiterate that the prices for the 
interconnection and network elements critical to the development of a 
competitive local exchange should be based on the pro-competition, 
forward-looking, economic costs of those elements, which may be higher 
or lower than historical embedded costs. Such pricing policies will 
best ensure the efficient investment decisions and competitive entry 
contemplated by the 1996 Act, which should minimize the regulatory 
burdens and economic impact of our decisions on small entities.
    475. Incumbent LECs contend generally that, in order to ensure they 
will recover their total investment costs and earn a profit, they must 
recover embedded costs. These costs, they argue, were incurred under 
federal and regulatory oversight and therefore should be recoverable. 
We are not convinced by the incumbent LECs' principal arguments for 
recognizing embedded cost in setting section 251 pricing rules. Even if 
the incumbent LECs' contention is correct, increasing the rates for 
interconnection and unbundled elements offered to competitors would 
interfere with the development of efficient competition, and is not the 
proper remedy for any past under-depreciation. Moreover, contrary to 
assertions by some incumbent LECs, regulation does not and should not 
guarantee full recovery of their embedded costs. Such a guarantee would 
exceed the assurances that we or the states have provided in the past. 
We have considered the economic impact of precluding recovery of small 
incumbent LECs' embedded costs. We do not believe that basing the 
prices of interconnection and unbundled elements on an incumbent LEC's 
embedded costs would advance the pro-competitive goals of the statute. 
We also note that certain small incumbent LECs are not subject to our 
rules under section 251(f)(1) of the 1996 Act, unless otherwise 
determined by a state commission, and certain other small incumbent 
LECs may seek relief from their state commissions from our rules under 
section 251(f)(2) of the 1996 Act.
    476. We acknowledge that some incumbent LECs may have incurred 
certain embedded costs reasonably before the passage of the 1996 Act, 
based on different regulatory regimes. Some incumbent LECs may assert 
that they have made certain historical investments required by 
regulators that they have been denied a reasonable opportunity to 
recover in the past and that the incumbent LECs may no longer have a 
reasonable opportunity to recover in the new environment of the 1996 
Act. The record before us, however, does not support the conclusion 
that significant residual embedded costs will necessarily result from 
the availability of network elements at economic costs. To the extent 
that any such residual consists of costs of meeting universal service 
obligations, the recovery of such costs can and should be considered in 
our ongoing universal service proceeding. Universal Service NPRM. To 
the extent a significant residual exists within the interstate 
jurisdiction that does not fall within the ambit of section 254, we 
intend that to address that issue in our upcoming proceeding on access 
reform.
    477. Opportunity Cost--Efficient Component Pricing Rule. A number 
of incumbent LECs advocate using the ``efficient component pricing 
rule'' (ECPR) to set the prices that incumbent LECs charge new entrants 
for inputs required to produce the same retail services the incumbent 
produces. Under the ECPR, the price of an input should be equal to the 
incremental cost of the input plus the opportunity cost that the 
incumbent carrier incurs when the new entrant provides the services 
instead of the incumbent. The opportunity cost, which is computed as 
revenues less all incremental costs, represents both profit and 
contribution to common costs of the incumbent, given the existing 
retail prices of the services being sold.
    478. We conclude that ECPR is an improper method for setting prices 
of interconnection and unbundled network elements because the existing 
retail prices that would be used to compute incremental opportunity 
costs under ECPR are not cost-based. Moreover, the ECPR does not 
provide any mechanism for moving prices towards competitive levels; it 
simply takes prices as given. The record indicates that both incumbents 
and new entrants agree that

[[Page 45549]]

retail prices are not based on costs. Incumbents generally argue that 
local residential retail prices are below costs while new entrants 
contend that they exceed competitive levels. In either case, 
application of ECPR would result in input prices that would be either 
higher or lower than those which would be generated in a competitive 
market and would not lead to efficient retail pricing.
    479. In markets where retail prices exceed competitive levels, 
entry would take place if network element prices were set at efficient 
competitive levels. The ECPR, however, will serve to discourage 
competition in these very markets because it relies on the prevailing 
retail price in setting the price which new entrants pay the incumbent 
for inputs. While ECPR establishes conditions for efficient entry given 
existing retail prices, as its advocates contend, the ECPR provides no 
mechanism that will force retail prices to their competitive levels. We 
do not believe that Congress envisioned a pricing methodology for 
interconnection and network elements that would insulate incumbent 
LECs' retail prices from competition. Instead, Congress specifically 
determined that input prices should be based on costs because this 
would foster competition in the retail market. Therefore, we reject the 
use of ECPR for establishing prices for interconnection and unbundled 
elements.
    480. As discussed above, the record in this docket shows that end 
user prices are not cost-based. In Open Video Systems, in contrast, we 
did not find that there would be a problem with the determination of 
end user prices. Implementation of Section 302 of the 
Telecommunications Act of 1996--Open Video Systems, Second Report and 
Order, 61 FR 28698 (June 5, 1996). We concluded that ``[u]se of [an 
ECPR] approach is appropriate in circumstances where the pricing is 
applicable [sic] to a new market entrant (the open video system 
operator) that will face competition from an existing incumbent 
provider (the incumbent cable operator), as opposed to circumstances 
where the pricing is used to establish a rate for an essential input 
service that is charged to a competing new entrant by an incumbent 
provider.'' In addition, in Open Video Systems, we concluded that the 
ECPR is appropriate because it encourages entry for open video system 
operators and also enhances the availability of carriage for 
unaffiliated programmers. The ECPR generally protects the provider's 
profits and provides opportunities for third parties to use the 
provider's inputs. The ECPR does not provide a mechanism to drive 
retail prices to competitive levels, however. In Open Video Systems, we 
wanted to encourage entry by open video system providers and to 
encourage them to have incentives to open their systems to unaffiliated 
programmers. Here, our goal is to ensure that competition between 
providers, including third party providers using interconnection and 
unbundled elements, will drive prices toward competitive levels and 
thus use of the ECPR is inappropriate.
    481. Universal Service Subsidies. We conclude that funding for any 
universal service mechanisms adopted in the universal service 
proceeding may not be included in the rates for interconnection, 
network elements, and access to network elements that are arbitrated by 
the states under sections 251 and 252. Sections 254(d) and 254(e) of 
the 1996 Act mandate that universal service support be recovered in an 
equitable and nondiscriminatory manner from all providers of 
telecommunications services. We conclude that permitting states to 
include such costs in rates arbitrated under sections 251 and 252 would 
violate that requirement by requiring carriers to pay specified 
portions of such costs solely because they are purchasing services and 
elements under section 251. Section 252(d)(1) requires that rates for 
interconnection, network elements, and access to network elements 
reflect the costs of providing those network elements, not the costs of 
supporting universal service.
    482. Section 254(f) provides that a state may adopt equitable, 
nondiscriminatory, specific, and predictable mechanisms to advance 
universal service within that state. If a state collects universal 
service funding in rates for elements and services pursuant to sections 
251 and 252, it will be imposing non-cost based charges in those rates. 
Including non-cost based charges in the rates for interconnection and 
unbundled elements is inconsistent with our rules implementing sections 
251 and 252 which require that these rates be cost-based. It is also 
inconsistent with the requirement of section 254(f) that 
telecommunications carriers contribute to state universal service on a 
nondiscriminatory basis, because telecommunications carriers requesting 
interconnection or access to unbundled network elements will be 
required to make contributions to universal service support through 
such surcharges. States may not, therefore, include universal service 
support funding in the rates for elements and services pursuant to 
sections 251 and 252, nor may they implement mechanisms that have the 
same effect. For example, states may not fund universal service support 
by imposing higher rates for interconnection, unbundled elements, or 
transport and termination on carriers that offer service to different 
types of customers or different geographic areas. To the extent that 
New York's ``pay or play'' system funds universal service in this 
manner, it violates sections 251, 252, and 254 of the 1996 Act. Nothing 
in the 1996 Act or in this Order, however, precludes a state from 
adopting a universal service funding mechanism, whether interim or 
otherwise, if such funds are collected in accordance with section 
254(f) on an ``equitable and nondiscriminatory basis'' through 
``specific, predictable, and sufficient mechanisms that do not rely on 
or burden Federal universal service support mechanisms.''
    483. Our decision here does not exempt carriers purchasing elements 
or services under section 251 from contributing to (or possibly 
receiving) universal service support. Rather, the recovery of universal 
service support costs from telecommunications carriers, including 
carriers requesting unbundled network elements, will be governed by 
section 254 of the 1996 Act. Federal universal service support 
mechanisms will be determined by our decisions reached in CC Docket 96-
45, based on the recommendations of the Federal/State Universal Service 
Joint Board, and states may adopt additional universal service support 
mechanisms consistent with section 254(f).
    484. We are mindful that the requirements of the 1996 Act may be 
disruptive to existing state universal service support mechanisms 
during the period commencing with this order and continuing until we 
complete our universal service proceeding to implement section 254. As 
discussed in the subsection immediately below, we permit incumbent LECs 
to continue to recover certain non-cost-based interstate access charge 
revenues for a limited period of time, largely because of concerns 
about possible deleterious impacts on universal service. We also 
authorize incumbent LECs, for a similar limited period of time, to 
continue to recover explicit intrastate universal service subsidy 
revenues based on intrastate access charges. This mechanism minimizes 
any possibility that implementation of sections 251 and 252 will unduly 
harm universal service during the interim period prior to completion of 
our universal service and access reform proceedings. Because we 
conclude this action should adequately provide for the continuation of 
a portion

[[Page 45550]]

of existing subsidy flows during a transition period until completion 
of our proceeding implementing section 254, we decline to permit any 
additional funding of universal service support through rates for 
interconnection, unbundled elements, and transport and termination 
during the interim period.
    485. Interim Application of Access Charges to Purchasers of 
Unbundled Local Switching Element. In the introduction of this Order, 
we emphasize that implementation of section 251 of the 1996 Act is 
integrally related to both universal service reform as required under 
section 254, and to reform of the interstate access charge system. In 
order to achieve pro-competitive, deregulatory markets for all 
telecommunications services, we must create a new system of funding 
universal service that is specific, explicit, predictable, sufficient, 
and competitively neutral. We also must move access charges to more 
cost-based and economically efficient levels. We intend to fulfill both 
of these goals in the coming months, by completing our pending 
universal service proceeding to implement section 254 by our statutory 
deadline of May 1997, and by addressing access charge issues in an 
upcoming access reform proceeding. The 1996 Act, however, requires us 
to adopt rules implementing section 251 by August 1996. We are 
concerned that implementation of the requirements of section 251 now, 
without taking into account the effects of the new rules on our 
existing access charge and universal service regimes, may have 
significant, immediate, adverse effects that were neither intended nor 
foreseen by Congress.
    486. Specifically, as we conclude above, the 1996 Act permits 
telecommunications carriers that purchase access to unbundled network 
elements from incumbent LECs to use those elements to provide 
telecommunications services, including the origination and termination 
of interstate calls. Without further action on our part, section 251 
would allow entrants to use those unbundled network facilities to 
provide access services to customers they win from incumbent LECs, 
without having to pay access charges to the incumbent LECs. This result 
would be consistent with the long term outcome in a competitive market. 
In the short term, however, while other aspects of our regulatory 
regime are in the process of being reformed, such a change may have 
detrimental consequences.
    487. The access charge system includes non-cost-based components 
and elements that at least in part may represent subsidies, such as the 
carrier common line charge (CCLC) and the transport interconnection 
charge (TIC). The CCLC recovers part of the allocated interstate costs 
for incumbent LECs to provide local loops to end users. In the 
universal service NPRM, we observed that the CCLC may result in higher-
volume toll users paying rates that exceed cost, and some customers 
paying rates that are below cost. We sought comment on whether that 
subsidy should be continued, and on whether and how it should be 
restructured. Universal Service NPRM. The nature of most of the 
revenues recovered through the TIC is unclear and subject to dispute, 
although a portion of the TIC is associated with certain costs related 
to particular transport facilities. Although the TIC was not created to 
subsidize local rates, some parties have argued in the Transport 
proceeding and elsewhere that some portion of the revenues now 
recovered through the TIC may be misallocated local loop or intrastate 
costs that operate to support universal service. First Transport Order. 
57 FR 54717 (November 20, 1992). In the forthcoming access reform 
proceeding, we intend to consider the appropriate disposition of the 
TIC, including the development of cost-based transport rates as 
directed by the United States Court of Appeals for the District of 
Columbia Circuit in Competitive Telecommunications Association v. FCC, 
87 F.3d 522 (1996) (CompTel v. FCC).
    488. Without a temporary mechanism such as the one we adopt below, 
the implementation of section 251 would permit competitive local 
service providers that also provide interstate long-distance service to 
avoid totally the CCLC and the TIC, which in part represent 
contributions toward universal service, by serving their local 
customers solely through the use of unbundled network elements rather 
than through resale. We believe that allowing such a result before we 
have reformed our universal service and access charge regimes would be 
undesirable as a matter of both economics and policy, because carrier 
decisions about how to interconnect with incumbent LECs would be driven 
by regulatory distortions in our access charge rules and our universal 
service scheme, rather than the unfettered operation of a competitive 
market. Because of our desire to err on the side of caution where 
universal service may be implicated, we conclude that some action is 
needed during the interim period before we complete our access reform 
and universal service proceedings.
    489. We conclude that we should establish a temporary transitional 
mechanism to help complete all of the steps toward the pro-competitive 
goal of the 1996 Act, including the implementation of a new, 
competitively-neutral system to fund universal service and a 
comprehensive review of our system of interstate access charges. 
Therefore, for a limited period of time, incumbent LECs may recover 
from interconnecting carriers the CCLC and a charge equal to 75 percent 
of the TIC for all interstate minutes traversing the incumbent LECs' 
local switches for which the interconnecting carriers pay unbundled 
local switching element charges. Incumbent LECs may recover these 
charges only until the earliest of: (1) June 30, 1997; (2) the 
effective date of final decisions by the Commission in both the 
universal service and access reform proceedings; or (3) if the 
incumbent LEC is a BOC, the date on which that BOC is authorized under 
section 271 of the 1996 Act to offer in-region interLATA service. The 
end date for BOCs that are authorized to offer interLATA service shall 
apply only to the recovery of access charges in those states in which 
the BOC is authorized to offer such service.
    490. We tentatively concluded in the NPRM that purchasers of 
unbundled network elements should not be required to pay access 
charges. We reaffirm our conclusion above in our discussion of 
unbundled network elements that nothing on the face of sections 
251(c)(3) and 252(d)(1) compels telecommunications carriers that use 
unbundled elements to pay these charges, nor limits these carriers' 
ability to use unbundled elements to originate or terminate interstate 
calls, and that payment of rates based on TELRIC plus a reasonable 
allocation of common costs, pursuant to section 251(d)(1), represents 
full compensation to the incumbent LEC for use of the network elements 
that telecommunications carriers purchase. Because of the unique 
situation described in the preceding paragraphs, however, we conclude, 
contrary to our proposal in the NPRM, that during a time-limited 
period, interconnecting carriers should not be able to use unbundled 
elements to avoid access charges in all cases. As detailed below, this 
temporary mechanism will apply only to carriers that purchase the local 
switch as an unbundled network element, and use that element to 
originate or terminate interstate traffic. We are applying these 
transitional charges to the unbundled local switching element, rather 
than to any

[[Page 45551]]

other network elements, because such an approach is most closely 
analogous to the manner in which the CCLC and TIC are recovered in the 
interstate access regime. Currently, the CCLC and TIC apply to 
interstate switched access minutes that traverse incumbent LECs' local 
switches. Applying the CCLC and 75 percent of the TIC to the unbundled 
local switching element is consistent with our goal of minimizing 
disruptions while we reform our universal service system and consider 
changes to our access charge mechanisms. Moreover, the CCLC and the TIC 
are recovered on a per-minute basis, and the local switch is the 
primary point at which incumbent LECs are capable of recording 
interstate minutes for traffic associated with end user customers of 
requesting carriers.
    491. We have crafted this short-term continuation of certain access 
charge revenue flows to minimize the possibility that incumbent LECs 
will be able to ``double recover'' through access charges the facility 
costs that new entrants have already paid to purchase unbundled 
elements. For that reason, we do not permit incumbent LECs to assess on 
purchasers of the unbundled local switching element any interstate 
access charges other than the CCLC and 75 percent of the TIC. The other 
access charges are all designed to recover the cost of particular 
facilities involved in the provision of interstate access services, 
such as local switching, dedicated interoffice transport circuits, and 
tandem switching. Imposition of these facility-based access charges in 
addition to the cost-based charges for comparable network elements 
established under Section 252 could result in double recovery. The 
mechanism we establish will ensure that incentives created by non-cost-
based elements of access charges do not result in harmful consequences 
prior to completion of access reform and our universal service 
proceeding. Imposition of additional access charges is therefore not 
necessary. We note that this mechanism serves to minimize the 
potentially disruptive effects of our decisions on incumbent LECs, 
including small incumbent LECs.
    492. For the same reason, we permit incumbent LECs to recover only 
75 percent of the TIC. Some portion of the TIC recovers revenues 
associated with specific transport facilities. To the extent that these 
costs can be identified clearly, they should not be imposed on new 
entrants through the TIC. Incumbent LECs will be fully compensated for 
any transport facilities that new entrants purchase from them through 
the unbundled element rates states establish under 252(d)(1), which, as 
we have stated, must be based on economic cost rather than access 
charges. In our interim transport rate restructuring, we explicitly set 
the initial tandem switching rate at 20 percent of the interstate 
revenue requirement, with the remainder included in the TIC. Transport 
Rate Structure and Pricing, Report and Order and Further Notice of 
Proposed Rulemaking, 57 FR 54717 (November 20, 1992). In addition, 
certain costs of upgrading incumbent LEC networks to support SS7 
signaling were allocated to transport through then-existing separations 
procedures. In our interim transport rate restructuring, we did not 
create any facility-based charges to recover these costs, so the 
associated revenues presumably were incorporated into the TIC. There 
may also be other revenues associated with transport facilities that 
are recovered today through the TIC. While we are uncertain of the 
precise magnitude of these revenues, in our best judgment, based on the 
record in the Transport proceeding and other information before us, we 
find that it is likely that these revenues approach, but probably do 
not exceed 25 percent of the TIC for most incumbent LECs. Thus, we 
believe that 25 percent is a conservative amount to exclude from the 
TIC to ensure that incumbent LECs do not double recover revenues 
associated with transport facilities from new entrants. Moreover, the 
Court in CompTel v. FCC remanded our Transport decision, in part, 
because of the inclusion of tandem switching revenues in the TIC rather 
than in the rate element for tandem switching. We find that excluding 
25 percent of the TIC represents a reasonable exercise of our 
discretion to prevent revenues associated with the tandem switching 
revenue requirement from being recovered from purchasers or unbundled 
local switching.
    493. We strongly emphasize that these charges will apply to 
purchasers of the unbundled switching element only for a very limited 
period, to avoid the possible harms that might arise if we were to 
ignore the effects on access charges and universal service of 
implementation of section 251. BOCs shall not be permitted to recover 
these revenues once they are authorized to offer in-region interLATA 
service, because at that time the potential loss of access charge 
revenues faced by a BOC most likely will be able to be offset by new 
revenues from interLATA services. Moreover, although we do not prejudge 
the conditions necessary to grant BOC petitions under section 271 to 
offer in-region interLATA service, we do decide that BOCs should not be 
able to charge the CCLC and the TIC, which are not based on forward-
looking economic costs, to competitors that use unbundled elements 
under section 251 once they are authorized to provide in-region 
interLATA service. Only BOCs are subject to special restrictions in the 
1996 Act to ensure that their entry into the in-region interLATA market 
does not have an adverse impact on competition. We conclude that this 
additional trigger date after which BOCs may not continue to receive 
access charges from purchasers of unbundled local switching is 
consistent with this Congressional design.
    494. We have selected June 30, 1997 as an ultimate end date for 
this transitional mechanism to coincide with the effective date for LEC 
annual access tariffs, and because we believe it is imperative that 
this transitional requirement be limited in duration. We can conceive 
of no circumstances under which the requirement that certain entrants 
pay the CCLC or a portion of the TIC on calls carried over unbundled 
network elements would be extended further. The fact that access or 
universal service reform have not been completed by that date would not 
be a sufficient justification, nor would any actual or asserted harm to 
the financial status of the incumbent LECs. By June 30, 1997, the 
industry will have had sufficient time to plan for and adjust to 
potential revenue shifts that may result from competitive entry. Thus, 
the economic impact of our decision on competitive local service 
providers, including those that are small entities, should be 
minimized.
    495. We believe that we have ample legal authority to implement 
this temporary transitional measure, and we find that this approach is 
consistent with the letter and spirit of the 1996 Act. We recognize 
that the CCLC and TIC have not been developed in accordance with the 
pricing standards of section 252(d)(1), and that to comply with the 
1996 Act, the rates that states establish for interconnection and 
unbundled network elements may not include non-cost-based amounts or 
subsidies. The 1934 and 1996 Acts do, however, give us legal authority 
to determine, for policy reasons, that users of LEC facilities should 
pay certain access charges for a period of time. New England Tel. and 
Tel . Co. v. FCC, 826 F.2d 1101 (DC. Cir 1987); North American 
Telecommunications Association v. FCC, 772 F.2d (7th Cir. 1085); 
Lincoln Tel. and Tel. Co. v. FCC, 659 F.2d (DC. Cir. 1989). Section 
4(i) of the 1934 Act authorizes the Commission to ``perform any and all 
acts * * * not

[[Page 45552]]

inconsistent with this Act, as may be necessary in the execution of its 
functions.'' Given the extraordinary upheaval in the industry's 
structure set in motion by the 1996 Act, and the specific concerns 
described above, we believe that a temporary mechanism is necessary in 
order to ensure that the policy goals underlying the access charge 
system and the Communications Act itself are not undermined. Further, 
we believe section 251(g) of the 1996 Act lends support to our 
decision. As discussed above, section 251(g) does not require that 
incumbent LECs continue to receive access charge revenues when 
telecommunications carriers use unbundled incumbent LEC network 
elements to originate and terminate interstate traffic. That section 
does, however, provide evidence of Congressional recognition of the 
potential tension between existing interconnection obligations, such as 
access charges, and the new methods of interconnection mandated by 
section 251, and therefore supports our decision to create a limited-
duration mechanism to address this tension.
    496. The decision of the court in CompTel v. FCC to remand our 
decision to adopt the TIC is not inconsistent with this approach. The 
Court's concern stemmed, in part, from the inclusion of a portion of 
the interstate tandem switching revenue requirement in the TIC. We have 
excluded from the charges that purchasers of unbundled local switching 
must pay a percentage of the TIC that, at a minimum, includes these 
allocated tandem switching revenues from the transitional charges that 
incumbent LECs may assess on IXCs. Furthermore, the Court directed the 
Commission to develop a cost-based transport rate structure, or to 
explain why it chose not to do so. Competitive Telecommunications 
Association v. FCC, 87 F.3d 522 (DC. Cir 1996). We intend to fulfill 
this obligation in the forthcoming access reform proceeding. The charge 
equal to 75 percent of the TIC will be applied only as an interim 
measure for a brief, clearly-identified period, until that 
restructuring of access charges is completed. The court expressly 
acknowledged that the 1996 Act would have implications for the access 
charge system. For the reasons described above, we conclude that these 
effects necessitate temporary application of a portion of the TIC to 
entrants that win end user customers from LECs, and that purchase the 
local switch as an unbundled element to originate and terminate 
interstate and intrastate toll traffic for such end users. In the 
access reform proceeding, we intend to determine the appropriate 
disposition for these revenues. Until we have had the opportunity to do 
so, however, we permit incumbent LECs to recover a transitional charge 
equal to 75 percent of the TIC under the limited circumstances 
described herein.
    497. The interim mechanism we establish here differs from the 
waiver relief we have previously granted to NYNEX and Ameritech to 
permit them to recover certain interstate access charge revenues 
through ``bulk billing'' of revenues to all interstate switched access 
customers. Those orders responded to waiver requests filed prior to the 
passage of the 1996 Act. Our responsibility in those proceedings was to 
determine whether special circumstances existed, and whether the 
specific relief requested better served the public interest than 
continued application of our general rules. By constrast, the action we 
take today addresses industry-wide issues that arise from the new 
regime put into place by section 251 of the 1996 Act, which allows 
states to establish unbundled network element rates that recover the 
full unseparated cost of elements. Our response to the Ameritech and 
NYNEX waiver petitions does not, simply because those petitions also 
concerned access charge recovery, constrain our decision in this 
proceeding.
    498. It would be unreasonable to provide such a transitional 
mechanism on the federal level, but to deny similar authority to the 
states. Therefore, states may continue existing explicit universal 
service support mechanisms based on intrastate access charges for an 
interim period of a similar brief, clearly-defined length. During that 
period, unless decided otherwise by the state, incumbent LECs may 
continue to recover such revenues from purchasers of unbundled local 
switching elements that use those elements to originate or terminate 
intrastate toll calls for end user customers they win from incumbent 
LECs. States may terminate these mechanisms at any time. We define 
mechanisms based on intrastate access charges as those mechanisms that 
require purchasers of intrastate access services from incumbent LECs to 
pay non-cost-based charges for those access services on the basis of 
their intrastate access minutes of use.
    499. We do not intend, however, that such a transitional mechanism 
eviscerate the requirements of sections 252 and 254, which, as we have 
stated, prohibit funding of universal service subsidies through rates 
for interconnection and unbundled network elements. Mechanisms such as 
New York's ``pay or play'' system, which would impose intrastate access 
charges on non-access services rather than allowing incumbent LECs to 
recover non-cost-based revenues from purchasers of access services, may 
not be included in this interim system. Such a result is justified 
because state ``pay or play'' mechanisms do not at present constitute a 
significant revenue stream to incumbent LECs, and therefore elimination 
of this mechanism is unlikely, in the short term, to have significant 
detrimental effects on universal service support.
    500. These state mechanisms must end on the earlier of: (1) June 
30, 1997; or (2) if the incumbent LEC that receives the transitional 
access charge revenues is a BOC, the date on which that BOC is 
authorized under section 271 of the 1996 Act to offer in-region 
interLATA service. With one exception, the analysis provided above as 
to the rationale for the end dates for the transitional interstate 
access charge mechanism applies here as well. Because our access reform 
proceeding focuses on federal charges, and because the full extent of 
the section 254 universal service mechanism remains to be determined in 
that proceeding, intrastate access charge-based universal service 
support mechanisms should not now be required to terminate upon the 
completion of those proceedings.
    501. As with our decision to permit incumbent LECs to continue to 
receive certain interstate access charge revenues from some purchasers 
of unbundled local switching for a limited period of time, we believe 
our decision to allow states to preserve certain intrastate universal 
service support mechanisms based on access charges is within our 
authority under section 251(d)(1) of the 1996 Act, and section 4(i) of 
the 1934 Act. Moreover, although section 251(g) does not directly refer 
to intrastate access charge mechanisms, it would be incongruous to 
conclude that Congress was concerned about the effects of potential 
disruption to the interstate access charge system, but had no such 
concerns about the effects on analogous intrastate mechanisms.
(c) Fifth Amendment Issues
    502. We conclude that our decision that prices for incumbent LECs' 
unbundled elements and interconnection offerings be based on forward-
looking economic cost does not violate the incumbent LECs' rights under 
the Fifth Amendment of the Constitution. The Supreme Court has 
recognized that public utilities owned and operated by private 
investors, even though their assets are employed in the public interest 
to provide consumers

[[Page 45553]]

with service, may assert their rights under the Takings Clause of the 
Fifth Amendment. Duquesne Light Co. v. Barasch, 488 U.S. 299, 307 
(1989). In applying the Takings Clause to rate setting for public 
utilities, the Court has stated that ``[t]he guiding principle has been 
that the Constitution protects utilities from being limited to a charge 
for their property serving the public which is so `unjust' as to be 
confiscatory.''
    503. The Supreme Court has held that the determination of whether a 
rate is confiscatory depends on whether that rate is just and 
reasonable, and not on what methodology is used. In re Permian Basin 
Area Rate Cases, 390 U.S. 747 (1968); Federal Power Commission v. 
Memphis Light, Gas & Water Division, 411 U.S. 458 (1973); Jersey 
Central Power & Light v. FERC, 810 F.2d 1168 (D.C. Cir. 1987). In 
Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944), the 
Court upheld the Federal Power Commission's order that required the 
company to make a large reduction in wholesale gas rates. The 
commission based its determination of a reasonable rate of return on a 
plant valuation determined by using a historical cost methodology that 
was only half as large as the company's own valuation based on forward-
looking reproduction costs. In its decision, the Court set forth the 
governing legal standard for determining whether a rate is 
constitutional:

    Under the statutory standard of ``just and reasonable'' it is 
the result reached not the method employed that is controlling. It 
is not the theory but the impact of the rate order which counts. If 
the total effect of the rate order cannot be said to be unjust and 
unreasonable, judicial inquiry under the Act is at an end. The fact 
that the method employed to reach that result may contain 
infirmities is not then important.

    504. The Court went on to explain that, in determining whether a 
rate is reasonable, the regulatory body must balance the interests of 
both the investor and consumer. ``From the investor or company point of 
view, it is important that there be enough revenue not only for 
operating expenses but also for the capital costs of the business * * 
*. [T]he return on the equity owner should be commensurate with returns 
on investments in other enterprises having corresponding risks.''
    505. Under sections 251(c) (2) and (3) of the 1996 Act, incumbent 
LECs must establish rates for interconnection and unbundled elements 
that are just and reasonable. In adopting the rules that govern those 
rates, under Hope Natural Gas we must consider whether the end result 
of incumbent LEC rates is just and reasonable. Incumbent LECs argue 
that establishing a rate structure that does not permit recovery of 
historical or embedded costs is confiscatory. We disagree. As stated 
above, the Court has consistently held since Hope Natural Gas that it 
is the end result, not the method used to achieve that result, that is 
the issue to be addressed. Indeed, the Court has found that the 
``fixing of prices, like other applications of the police power, may 
reduce the value of the property which is being regulated. But the fact 
that the value is reduced does not mean that the regulation is 
invalid.'' Moreover, the Court has upheld as reasonable changes in 
ratemaking methodology when the change resulted in the exclusion of 
historical costs prudently incurred. Thus, the mere fact that an 
incumbent LEC may not be able to set rates that will allow it to 
recover a particular cost incurred in establishing its regulated 
network does not, in and of itself, result in confiscation.
    506. Moreover, Hope Natural Gas requires only that the end result 
of our overall regulatory framework provides LECs a reasonable 
opportunity to recover a return on their investment. In other words, 
incumbent LECs' overall rates must be considered, including the 
revenues for other services under our jurisdiction.
    507. In this proceeding, we are establishing pricing rules that 
should produce rates for monopoly elements and services that 
approximate what the incumbent LECs would be able to charge if there 
were a competitive market for such offerings. We believe that a 
forward-looking economic cost methodology enables incumbent LECs to 
recover a fair return on their investment, i.e., just and reasonable 
rates. The record does not compel a contrary conclusion. No incumbent 
LEC has provided persuasive evidence that prices based on a forward-
looking economic cost methodology would have a significant impact on 
its ``financial integrity.'' We further note that at least one federal 
appellate court has held incremental cost-based pricing constitutional. 
Metropolitan Transp. Auth. v. Interstate Commerce Commission, 792 F.2d 
287, 297 (2d Cir.), cert. denied, 479 U.S. 1017 (1986).
    508. Incumbent LECs may seek relief from the Commission's pricing 
methodology if they provide specific information to show that the 
pricing methodology, as applied to them, will result in confiscatory 
rates. We also do not completely foreclose the possibility that 
incumbent LECs will be afforded an opportunity to recover, to some 
extent, their embedded costs through a mechanism separate from rates 
for interconnection and unbundled network elements. As stated above, we 
intend to explore this issue in detail in our upcoming access reform 
proceeding.
    509. GTE argues that the proper standard to review our ratemaking 
methodology is the just compensation standard generally reserved for 
takings of property. This is in effect a contention that the 1996 Act's 
physical collocation and unbundled network facility requirements 
constitute physical occupation of their property that should be deemed 
a taking and that must be subject to ``just compensation.'' Assuming 
for the sake of argument that the physical collocation and unbundled 
facilities requirements do result in a taking, we nevertheless find 
that the ratemaking methodology we have adopted satisfies the just 
compensation standard. Just compensation is normally measured by the 
fair market value of the property subject to the taking. Just 
compensation is not, however, intended to permit recovery of monopoly 
rents. The just and reasonable rate standard of TELRIC plus a 
reasonable allocation of the joint and common costs of providing 
network elements that we are adopting attempts to replicate, with 
respect to bottleneck monopoly elements, the rates that would be 
charged in a competitive market, Policy and Rules Concerning Rates for 
Dominant Carriers, Further Notice of Proposed Rulemaking, 53 FR 22356 
(June 15, 1988), and, we believe, is entirely consistent with the just 
compensation standard. Indeed, a similar rate methodology based on 
incremental costs has been found to satisfy the just compensation 
requirement. For these reasons, we conclude that, even if the 1996 
Act's physical collocation and unbundled network facility requirements 
constitute a taking, a forward-looking economic cost methodology 
satisfies the Constitution's just compensation standard.
3. Rate Structure Rules
a. General Rate Structure Rules
(1) Background
    510. In addition to applying our economic pricing methodology to 
determine the rate level of a specific element or interconnection, the 
state must also determine the appropriate rate structure. We discuss in 
this section general principles for analyzing rate structure questions, 
such as in what circumstances charges should be flat-rated or usage 
sensitive and in what circumstances they should be recurring or non-
recurring. These rate structure

[[Page 45554]]

rules will apply as well if a state sets rates based on default proxies 
discussed in Section VII.C.2 below, where we also discuss the 
appropriate rate structure for specific network elements. Network 
providers incur costs in providing two broad categories of facilities, 
dedicated and shared. Dedicated facilities are those that are used by a 
single party--either an end user or an interconnecting network. Shared 
facilities are those used by multiple parties. In the NPRM, we proposed 
that costs should be recovered in a manner that reflects the way they 
are incurred. We also sought comment on whether we should require 
states to provide for recovery of dedicated facility costs on a flat-
rated basis, or at a minimum, require LECs to offer a flat-rate option.
(2) Discussion
    511. We conclude, as a general rule, that incumbent LECs' rates for 
interconnection and unbundled elements must recover costs in a manner 
that reflects the way they are incurred. This will conform to the 1996 
Act's requirement that rates be cost-based, ensure requesting carriers 
have the right incentives to construct and use public network 
facilities efficiently, and prevent incumbent LECs from inefficiently 
raising costs in order to deter entry. We note that this conclusion 
should facilitate competition on a reasonable and efficient basis by 
all firms in the industry by establishing prices for interconnection 
and unbundled elements based on costs similar to those incurred by the 
incumbents, which may be expected to reduce the regulatory burdens and 
economic impact of our decision for many parties, including both small 
entities seeking to enter the local exchange markets and small 
incumbent LECs. We also adopt some more specific rules that follow from 
this general rule.
    512. First, we require that the charges for dedicated facilities be 
flat-rated, including, but not limited to, charges for unbundled loops, 
dedicated transport, interconnection, and collocation. These charges 
should be assessed for fixed periods, such as a month. We are requiring 
flat-rated charges for dedicated facilities. Usage-based charges for 
dedicated facilities would give purchasers of access to network 
elements an uneconomic incentive to reduce their traffic volumes. 
Moreover, purchasers of access to network elements with low volumes of 
traffic would pay below-cost prices, and therefore have an incentive to 
add lines that they would not add if they had to pay the full cost. As 
stated in the NPRM, a flat-rated charge is most efficient for dedicated 
facilities, because it ensures that a customer will pay the full cost 
of the facility, and no more. It ensures that an entrant will, for 
example, purchase the exclusive right to use additional loops only if 
the entrant believes that the benefits of the additional loops will 
exceed its costs. It also ensures that the entrant will not face an 
additional (and non-cost-based) usage charge.
    513. Second, if we apply our general rule that costs should be 
recovered in a manner that reflects the way they are incurred, then 
recurring costs must be recovered through recurring charges, rather 
than through a nonrecurring charge. A recurring cost is one incurred 
periodically over time. A LEC may not recover recurring costs such as 
income taxes, maintenance expenses, and administrative expenses through 
a nonrecurring charge because these are costs that are incurred in 
connection with the asset over time. For example, we determine that 
maintenance expenses relating to the local loop must be recovered 
through the recurring loop charge, rather than through a nonrecurring 
charge imposed upon the entrant.
    514. We find that recovering a recurring cost through a 
nonrecurring charge would be unjust and unreasonable because it is 
unlikely that incumbent LECs will be able to calculate properly the 
present value of recurring costs. To calculate properly the present 
value of recurring costs, an incumbent LEC would have to project 
accurately the duration, level, and frequency of the recurring costs 
and estimate properly its overall cost of capital. We find that, in 
practice, the present value of the recurring costs cannot be calculated 
with sufficient accuracy to warrant up-front recovery of these costs 
because incumbent LECs lack sufficient experience with the provision of 
interconnection and unbundled rate elements. Without sufficient 
experience, incumbent LECs are unable to project the length of time 
that an average entrant would interconnect with, or take an unbundled 
element from, the incumbent LEC, or how expenses associated with 
interconnection and unbundled rate elements would change over time. In 
contrast, a recurring charge for a recurring cost would ensure that a 
customer is only charged for the costs the entrant incurs while that 
entrant is taking interconnection service or unbundled rate elements 
from the incumbent LEC. Moreover, when costs associated with the 
interconnection and particular unbundled rate elements change, the 
incumbent LEC can make appropriate adjustments to the charges at the 
time such cost changes occur.
    515. Accordingly, we find that imposing nonrecurring charges for 
recurring costs could pose a barrier to entry because these charges may 
be excessive, reflecting costs that may (1) not actually occur; (2) be 
incurred later than predicted; (3) not be incurred for as long as 
predicted; (4) be incurred at a level that is lower than predicted; (5) 
be incurred less frequently than predicted; and (6) be discounted to 
the present using a cost of capital that is too low.
    516. Notwithstanding the foregoing, where recurring costs are de 
minimis, we will permit incumbent LECs to recover such costs through 
nonrecurring charges. We find that recurring costs are de minimis where 
the costs of administering the recurring charge would be excessive in 
relation to the amount of the recurring costs.
    517. Third, states may, but need not, require incumbent LECs in an 
arbitrated agreement to recover nonrecurring costs, costs that are 
incurred only once, through recurring charges over a reasonable period 
of time. The recovery of such nonrecurring costs through recurring 
charges is a common practice for telecommunications services. 
Construction of an interconnector's physical collocation cage is an 
example of a nonrecurring cost. We find that states may, where 
reasonable, require an incumbent LEC to recover construction costs for 
an interconnector's physical collocation cage as a recurring charge 
over a reasonable period of time in lieu of a nonrecurring charge. This 
arrangement would decrease the size of the entrant's initial capital 
outlay, thereby reducing financial barriers to entry. At the same time, 
any such reasonable arrangement would ensure that incumbent LECs are 
fully compensated for their nonrecurring costs.
    518. We require, however, that state commissions take steps to 
ensure that incumbent LECs do not recover nonrecurring costs twice and 
that nonrecurring charges are imposed equitably among entrants. A state 
commission may, for example, decide to permit incumbent LECs to charge 
the initial entrants the full amount of costs incurred for shared 
facilities for physical collocation service, even if future entrants 
may benefit. A state commission may, however, require subsequent 
entrants, who take physical collocation service in the same central 
office and receive benefits as a result of costs for shared facilities, 
to pay the incumbent LEC for their proportionate share of those costs, 
less depreciation (if

[[Page 45555]]

an asset is involved). Under this approach, the state commission could 
require the incumbent LEC to provide the initial entrants pro rata 
refunds, reflecting the full amount of the charges collected from the 
subsequent entrants. Alternatively, a state commission may decide to 
permit incumbent LECs to charge initial entrants a proportionate 
fraction of the costs incurred, based on a reasonable estimate of the 
total demand by entrants for the particular interconnection service or 
unbundled rate elements.
    519. In addition, state commissions must ensure that nonrecurring 
charges imposed by incumbent LECs are equitably allocated among 
entrants where such charges are imposed on one entrant for the use of 
an asset and another entrant uses the asset after the first entrant 
abandons the asset. For example, when an entrant pays a nonrecurring 
charge for construction of a physical collocation cage and the entrant 
discontinues occupying the cage before the end of the economic life of 
the cage, a state commission could require that the initial entrant 
receive a pro rata refund from the incumbent LEC for the undepreciated 
value of the cage in the event that a subsequent entrant takes physical 
collocation service and uses the asset. Under this approach, the state 
commission could require that the subsequent entrant pay the incumbent 
LEC a nonrecurring charge equal to the remaining unamortized value of 
the cage and the initial entrant will receive a credit from the 
incumbent LEC equal to the unamortized value of the cage at the time 
the subsequent entrant takes service and utilizes the cage.
    520. BellSouth's concern that rate structure rules could preclude 
mutually agreeable alternative structures is misplaced. The rate 
structure rules we adopt here apply only to rates imposed by the states 
in arbitration among the parties and to state review of BOC statements 
of generally available terms. Our rules do not restrict parties from 
agreeing to alternative rate structures. On the contrary, our intent, 
following the clear pro-negotiation spirit of the 1996 Act, is for 
parties to use the backdrop of state arbitrations conducted under our 
rules, to negotiate more efficient, mutually agreeable arrangements, 
subject, of course, to the antitrust laws and to the 1996 Act's 
requirements that voluntarily negotiated agreements not unreasonably 
discriminate against third parties.
b. Additional Rate Structure Rules for Shared Facilities
(1) Background
    521. In the NPRM, we stated our belief that the costs of shared 
facilities should be recovered in a manner that efficiently apportions 
costs among users that share the facility. The NPRM noted that, for 
shared facilities, it may be efficient to set prices using any of the 
following: a usage-sensitive charge; a usage-sensitive charge for peak-
time usage and a lower charge for off-peak usage; or a flat charge for 
the peak capacity that an interconnector wishes to pay for and use as 
though that portion of the facility were dedicated to the 
interconnector.
(2) Discussion
    522. The costs of shared facilities including, but not limited to, 
much of local switching, tandem switching, transmission facilities 
between the end office and the tandem switch, and signaling, should be 
recovered in a manner that efficiently apportions costs among users. 
Because the cost of capacity is determined by the volume of traffic 
that the facilities are able to handle during peak load periods, we 
believe, as a matter of economic theory, that if usage-sensitive rates 
are used, then somewhat higher rates should apply to peak period 
traffic, with lower rates for non-peak usage. The peak load price would 
be designed to recover at least the cost of the incremental network 
capacity added to carry peak period traffic. Pricing traffic during 
peak periods based on the cost of the incremental capacity needed to 
handle additional traffic would be economically efficient because 
additional traffic would be placed on the network if and only if the 
user or interconnecting network is willing to pay the cost of the 
incremental network capacity required to handle this additional 
traffic. Such pricing would ensure that a call made during the peak 
period generates enough revenue to cover the cost of the facilities 
expansion it requires, and would thus give carriers an incentive to 
expand and develop the network efficiently. In contrast, off-peak 
traffic imposes relatively little additional cost because it does not 
require any incremental capacity to be added to base plant, and 
consequently, the price for carrying off-peak traffic should be lower.
    523. We recognize, however, that there are practical problems 
associated with a peak-sensitive pricing system. For example, different 
parts of a given provider's network may experience peak traffic volumes 
at different times (e.g., business districts may experience their peak 
period between 10:00 and 11:00 a.m., while suburban areas may have 
their peak periods between 7:00 and 8:00 p.m.) Moreover, peak periods 
may change over time. For instance, growth in Internet usage may create 
new peak periods in the late evening. Further, charging different 
prices for calls made during different parts of the day may cause some 
customers to shift their calling to the less expensive time periods, 
which could shift the peak or create new peaks. Thus, to design an 
efficient peak-sensitive pricing system requires detailed knowledge of 
both the structure of costs as well as demand.
    524. We conclude that the practical problems associated with peak-
sensitive pricing make it inappropriate for us to require states to 
impose such a rate structure for unbundled local switching or other 
shared facilities whose costs vary with capacity. Because we believe 
that such a structure may be the most economically efficient, however, 
we do not prohibit states from imposing peak-sensitive pricing. We also 
expect that parties may be able to negotiate agreements with peak/off-
peak differences if the benefits of such distinctions are sufficiently 
high. We conclude that states may use either usage-sensitive rates or 
flat capacity-based rates for shared facilities, if a state finds that 
such rates reasonably reflect the costs imposed by the various users. 
States may consider for guidance rate structures developed in 
competitive markets for shared facilities. We note that our decisions 
in this section may benefit small entity entrants in local exchange and 
exchange access markets by minimizing the extent to which purchasers of 
interconnection and unbundled access pay rates that diverge from the 
costs of those facilities and services.
c. Geographic/Class-of-Service Averaging
(1) Background
    525. In the NPRM, we asked about the appropriate level of 
aggregation for rates for interconnection and access to unbundled 
elements. We noted that geographic averaging is simple to administer 
and prevents unreasonable or unlawful rate differences but, where 
averaging covers high and low cost areas, it could distort competitors' 
decisions whether to lease unbundled elements or build their own 
facilities. We sought comment on the geographic deaveraging of 
interconnection and unbundled element rates by zone, LATA, or other 
area.

[[Page 45556]]

    526. We also inquired about disaggregation by class of service. We 
questioned whether business and residential loops, or loops deployed 
using different technologies should be charged different rates, and how 
large a differential should be allowed.
(2) Discussion
    527. Geographic Deaveraging. The 1996 Act mandates that rates for 
interconnection and unbundled elements be ``based on the cost * * * of 
providing the interconnection of network elements.'' We agree with most 
parties that deaveraged rates more closely reflect the actual costs of 
providing interconnection and unbundled elements. Thus, we conclude 
that rates for interconnection and unbundled elements must be 
geographically deaveraged.
    528. The record reflects that at least two states have implemented 
geographically-deaveraged rate zones. These rate zone pricing systems 
have generally included a minimum of three zones. In the Expanded 
Interconnection proceeding, the Commission also permitted LECs to 
implement a three zone structure. Expanded Interconnection Order. 57 FR 
54323 (November 18, 1992); Expanded Interconnection Second Report and 
Order and Third Notice of Proposed Rulemaking. 58 FR 48756 (September 
17, 1993). We conclude that three zones are presumptively sufficient to 
reflect geographic cost differences in setting rates for 
interconnection and unbundled elements, and that states may, but need 
not, use these existing density-related rate zones. Where such systems 
are not in existence, states shall create a minimum of three cost-
related rate zones to implement deaveraged rates for interconnection 
and unbundled elements. A state may establish more than three zones 
where cost differences in geographic regions are such that it finds 
that additional zones are needed to adequately reflect the costs of 
interconnection and access to unbundled elements.
    529. Class-of-Service Deaveraging. The record leads us to the 
opposite conclusion for class-of-service deaveraging. Under the 1996 
Act, wholesale rates for resold services will be based on retail rates 
less avoided costs. Rates for interconnection and access to unbundled 
elements, however, are to be based on costs. We conclude that the 
pricing standard for interconnection and unbundled elements prohibits 
deaveraging that is not cost based. Interconnection and unbundled 
elements are intermediate services provided by incumbent LECs to other 
telecommunications carriers, and there is no evidence that the cost of 
providing these intermediate services varies with the class of service 
the telecommunications carrier is providing to its end-user customers. 
We conclude that states may not impose class-of-service deaveraging on 
rates for interconnection and unbundled elements. We disagree with the 
Ohio Consumers' Counsel's position that the 1996 Act's explicit 
permission of class-of-service deaveraging of resold services implies 
that class-of-service deaveraging should be permitted for 
interconnection and unbundled elements. Finally, we note that these 
decisions concerning averaging may be expected to lead to increased 
competition and a more efficient allocation of resources, which should 
benefit the entire industry, including small entities and small 
incumbent LECs.

C. Default Proxy Ceilings and Ranges

    530. As previously discussed, we strongly encourage state 
commissions, as a general rule, to set arbitrated rates for 
interconnection and access to unbundled network elements pursuant to 
the forward-looking, economic cost pricing methodology we adopt in this 
Order. Such rates would approximate levels charged in a competitive 
market, would be economically efficient, and would be based on the 
forward-looking, economic cost of providing interconnection and 
unbundled elements. We recognize, however, that, in some cases, it may 
not be possible for carriers to prepare, or the state commission to 
review, economic cost studies within the statutory time frame for 
arbitration and thus here first address situations in which a state has 
not approved a cost study. States that do not complete their review of 
a forward-looking economic cost study within the statutory time periods 
but must render pricing decisions, will be able to establish interim 
arbitrated rates based on the proxies we provide in this Order. A proxy 
approach might provide a faster, administratively simpler, and less 
costly approach to establishing prices on an interim basis than a 
detailed forward-looking cost study.
    531. The default proxies we establish will, in most cases, serve as 
presumptive ceilings. States may set prices below those ceilings if the 
record before them supports a lower price. States should provide a 
reasoned basis for selecting a particular default price. In one case, 
for local switching, the default proxy is a range within which a state 
may set prices.
    532. States that set prices based upon the default proxies must 
also require the parties to update the prices in the interconnection 
agreement on a going-forward basis, either after the state conducts or 
approves an economic study according to the cost-based pricing 
methodology or pursuant to any revision of the default proxy. We 
believe generic economic cost models, in principle, best comport with 
the preferred economic cost approach described previously, and we 
intend to examine further such models by the first quarter of 1997 to 
determine whether any of those models, with any appropriate 
modifications, could serve as better default proxies. Any updated price 
would take effect beginning at the time of the completed and approved 
study or the application of the revised default proxy.
    533. Second, if a state has approved or conducted an economic cost 
study, prior to this Order, that complies with the methodology we adopt 
in this Order, the state may continue to apply the resulting rate even 
when not consistent with our default proxies. There must, however, be a 
factual record, including the cost study, sufficient for purposes of 
review after notice and opportunity for the affected parties to 
participate.
    534. Finally, while we provide for the use by states of default 
proxies, we recognize that certain states that are unable to utilize an 
economic cost study may wish to obtain the benefits of setting rates 
pursuant to such a study for its residents. The Commission will 
therefore entertain requests by states to review an economic cost 
study, to assist the state in conducting or reviewing such a study, or 
to conduct such a study.
1. Use of Proxies Generally
a. Background
    535. In the NPRM, we discussed the possibility of setting certain 
outside limits for interconnection and unbundled element rates, in 
particular, by the use of proxies. We invited parties to comment on 
whether the use of certain proxies to set outer boundaries on the 
prices for interconnection and unbundled elements would be consistent 
with the pricing principles of the 1996 Act. Specifically, in the NPRM, 
we asked parties to comment on the benefits of various types of 
proxies: (1) generic cost studies, such as the Benchmark Cost Model and 
the Hatfield models; (2) some measure of nationally-averaged cost data; 
(3) rates in existing interconnection and unbundling arrangements 
between incumbent LECs and other providers of local service, such as 
neighboring incumbent LECs, CMRS providers, or other entrants in the

[[Page 45557]]

same service area; (4) a subset of the incumbent LECs' existing 
interstate access rates, charged for interconnection with IXCs and 
other access customers, or an intrastate equivalent; (5) use of the 
interstate prices established in the ONA proceeding for unbundled 
features and functions of the local switch as ceilings for the same 
unbundled elements under section 251; and (6) any other 
administratively simple methods for establishing a ceiling for 
interconnection and unbundled network element rates. As a counterpart 
to ceilings, we also sought comment on whether it would be necessary or 
appropriate for us to establish floors for interconnection and 
unbundled element prices.
b. Discussion
    536. We adopt, in the section below, default proxies for particular 
network elements. We believe that these default proxies generally will 
result in reasonable price ceilings or price ranges and, for 
administrative and practical reasons, will be beneficial to the states 
in conducting initial rate arbitrations, especially in the time period 
prior to completion of a cost study. The proxies we adopt are designed 
to approximate prices that will enable competitors to enter the local 
exchange market swiftly and efficiently and will constrain the 
incumbent LECs' ability to preclude efficient entry by manipulating the 
allocation of common costs among services and elements. States that 
utilize the default proxies we establish to set prices in an 
arbitration should revise those prices on a going-forward basis when 
they are able to utilize the preferred economic costing methodology we 
describe in Section VII.B.2.a. above, or if we subsequently adopt new 
proxies.
    537. We have considered the economic impact of the adoption of 
default proxy ceilings and ranges on small entities, including new 
entrants and small incumbent LECs. The adoption of proxies for interim 
arbitrated rates should minimize regulatory burdens on the parties to 
arbitration, including small entities seeking to enter the local 
exchange markets and small incumbent LECs, by permitting states to 
implement the 1996 Act more quickly and facilitating competition on a 
reasonable and efficient basis by all firms in the industry. We 
therefore believe that the adoption of default proxy ranges and 
ceilings advances the pro-competitive goals of the 1996 Act. We also 
note that certain small incumbent LECs are not subject to our rules 
under section 251(f)(1) of the 1996 Act, unless otherwise determined by 
a state commission, and certain other small incumbent LECs may seek 
relief from their state commissions from our rules under section 
251(f)(2) of the 1996 Act.
    538. The proxies that we establish represent the price ceiling or 
price ranges for the particular element on an averaged basis. In 
Section VII.B.3.c. above, we required that rates be set on a 
geographically-deaveraged basis. Consequently, states utilizing the 
proxies shall set rates such that the average rate for the particular 
element in a study area does not exceed the applicable proxy ceiling or 
lie outside the proxy range.
    539. We reject the use of rates in interconnection agreements that 
predate the 1996 Act as a proxy-based ceiling for interconnection and 
unbundled element rates. These existing interconnection agreements were 
not reached in a competitive market environment. Further, such 
agreements may reflect the divergent bargaining power of the parties to 
the agreement, various public policy initiatives to advance rural 
telephone service, or non-monetary quid pro quos often found in 
voluntarily negotiated business arrangements that may be difficult to 
quantify. There is little basis for us to conclude that rates in these 
interconnection agreements reflect the forward-looking, incremental 
cost of interconnection and unbundled network elements. Prices in 
agreements reached since the 1996 Act are more likely than prior 
agreements to provide useful information about forward-looking costs, 
which together with other information may be useful in establishing 
proxies.
    540. In the NPRM, we also raised the issue of using some measure of 
nationally-averaged cost data as a proxy. No such study has been 
submitted into the record in this proceeding.
2. Proxies for Specific Elements
a. Overview
    541. Although we encourage states to use an economic cost 
methodology to set rates for interconnection, unbundled network 
elements, and collocation, we will permit states unable to analyze an 
economic costing study within the statutory time constraints to use 
default proxies in setting and reviewing rates. We set forth below the 
default proxies for specific network elements. These proxies are 
interim only. They will apply only until a state sets rates in 
arbitrations on the basis of an economic cost study, or until we 
promulgate new proxies based on economic cost models. We also set forth 
below the rate structure rules that apply to each of network elements. 
These rate structure requirements are applicable regardless of whether 
a state uses an economic cost study or the proxy approach to set rate 
levels.
b. Discussion
(1) Loops
(a) Discussion
    542. Most loop costs are associated with a single customer. MTS and 
WATS Market Structure, Third Report and Order. 48 FR 10319 (March 11, 
1983). Outside plant between a customer's premises and ports on 
incumbent LEC switches is typically either physically separate for each 
individual customer, or has costs that can easily be apportioned among 
users. We therefore conclude that costs associated with unbundled loops 
should be recovered on a flat-rated basis. Usage-based rates for an 
unbundled loop would most likely translate into usage-based rates for 
new entrants' retail local customers. A retail usage-based rate would 
distort incentives for efficient use. Customers that had to pay a usage 
charge would have an incentive not to use the network in situations 
where the benefit of using the network exceeds the true cost of using 
the network. Usage-based loop prices would put an entrant at an 
artificial cost disadvantage when competing for high-volume customers. 
We note that MFS has filed a separate petition asking the Commission to 
preempt certain provisions of the Texas statute, which it contends 
requires incumbent LECs to sell unbundled local loops on a usage-
sensitive basis. We will rule specifically on the Texas statute when we 
consider the MFS Texas Petition.
    543. In general, we believe that states should use a TELRIC 
methodology to establish geographically deaveraged, flat-rate charges 
for access to unbundled loops. As discussed above, however, we 
recognize that, in some cases, it may not be possible for carriers to 
prepare, or for state commissions to review, economic cost studies 
within the statutory time frame for arbitration proceedings. Because 
reviewing and approving such cost studies takes time and because many 
states have not yet begun, or have only recently begun, to develop and 
examine such studies, it is critical for the near-term development of 
local competition to have proxies that provide an approximation of 
forward-looking economic costs and can be used by states almost 
immediately. These proxies would be used by a state commission until it 
is able either to complete a cost study or to evaluate and adopt the 
results of a study or studies

[[Page 45558]]

submitted in the record. In an NPRM to be issued shortly, we will 
investigate more fully various long-run incremental cost models in the 
record with an eye to developing a model that can be used to generate 
proxies for the forward looking economic costs of network elements. 
Until such time as we can develop such a model, we have developed the 
following default proxy ceilings that state commissions that have not 
completed forward looking economic cost studies may use in the interim 
as an approximation to the forward looking cost of the local loop.
    544. State commissions may use this proxy to derive a maximum (or 
ceiling) loop rate for each incumbent LEC operating within their state, 
and may establish actual unbundled loop rates at any level less than or 
equal to this maximum rate in specific arbitrations or other 
proceedings. Of course, we are encouraging states to have economic 
studies completed wherever feasible. Moreover, states will have to 
replace this proxy ceiling with the results of their own forward 
looking economic cost study or the results produced by a generic 
economic cost model that the Commission has approved.
    545. We are adopting a proxy ceiling based on two cost models and 
rates for unbundled loops allowed by six states that had available to 
them the results of forward-looking economic cost studies at the time 
they considered either interim or permanent rates for the unbundled 
loop element. These states are Colorado, Connecticut, Florida, 
Illinois, Michigan, and Oregon. Each of these states has used a 
standard that appears to be reasonably close to the forward-looking 
economic cost methodology that we require to be used, although possibly 
not consistent in every detail with our TELRIC methodology. Generally, 
these states appear to have included an allocation of forward-looking 
common costs in their unbundled loop prices. The individual state 
studies resulted in the following average rates for unbundled local 
loops: Colorado, $18; Connecticut, $12.95; Florida, $17.28; Illinois, 
$10.93; Michigan, $10.03; and Oregon, $12.45, computed as set forth 
below.
    546. The Colorado Commission set an interim rate of $18 per month 
for unbundled loops terminated at the main distribution frame of the 
LEC switch. The Connecticut Commission ruled that SNET must provide the 
following interim unbundled loop prices varying by four zones: metro 
$10.18; urban $11.33; suburban $15.33; and rural $14.97. In the absence 
of further information about customer density or average loop length by 
zone, we used a simple average equal to $12.95. The Florida Commission 
set an interim rate for 2-wire loops at $17.00 per month for BellSouth, 
$15.00 for United/Centel, and $20.00 for GTE. Using weights equal to 
the number of loops served by each company in 1994 as reported in the 
Monitoring Report, we computed a weighted average price equal to 
$17.28. Pursuant to its Customers First Order, the Illinois Commerce 
Commission approved tariffs establishing business rates equal to $7.08, 
$10.92, and $14.45, and residential rates equal to $4.59, $8.67, and 
$12.14 in three density zones. Based on data from Table 2.5, page 20 of 
the Common Carrier Statistics, 1995 Preliminary, we found a 36 percent-
64 percent business residential split. Using Illinois Commission data 
for number of households in each density zone (996,750 in zone A; 
2,788,759 in zone B; 4,594,567 in zone C), we computed an average loop 
cost of $10.93. The Michigan Commission approved transitional rates of 
$8.00 per loop for business and $11 per loop for residence. Based on 
Common Carrier Statistics, 1995 Preliminary data, we computed a 32 
percent-68 percent business-residential split in Michigan, which leads 
to an average rate of $10.03. The Oregon Commission set the rate for a 
``basic 2-wire loop set'' at $11.95 plus $0.50 for a network access 
channel connection, for a total price of $12.45.
    547. In order to set a proxy ceiling for unbundled loop elements we 
make use of the two cost models for which nationwide data are available 
and upon which parties have had the opportunity to comment in this 
proceeding. These models are the Benchmark Cost Model (BCM) and the 
Hatfield 2.2. Based on our current information, we believe that both 
these models are based on detailed engineering and demographic 
assumptions that vary among states, and that the outputs of these 
models represent sufficiently reasonable predictions of relative cost 
differences among states to be used as set forth below to set a proxy 
ceiling on unbundled loop prices for each state. We do not believe, 
however, that these model outputs by themselves necessarily represent 
accurate estimates of the absolute magnitude of loop costs. As we 
discuss below, further analysis is necessary in order to evaluate fully 
the procedures and input assumptions that the models use in order to 
derive cost estimates. Furthermore, in the case of BCM, model outputs 
include costs in addition to the cost of the local loop. In order to 
correct for these considerations, we have developed a hybrid cost proxy 
in the following manner. First, we have applied a scaling factor to the 
cost estimates of each model. This scaling is based on the actual rates 
computed for unbundled loop elements in the six states referred to 
above. Specifically we have multiplied the cost estimate produced by 
each model in each state by a factor equal to the unweighted average of 
rates adopted by state commissions in the six states, divided by the 
unweighted average of the model cost estimates for the same six states. 
Our hybrid cost proxy is computed as the simple average of the scaled 
cost estimates for the two models in each of the 48 contiguous states 
and the District of Columbia. Neither BCM nor Hatfield 2.2 provide cost 
estimates for Alaska and only the BCM provides an estimate for Hawaii. 
Our default loop cost proxies for Hawaii and Puerto Rico are based on 
the default loop cost proxies of the states that most closely 
approximate them in population density per square mile. We are not 
setting default loop cost proxies in this Order for Alaska or for any 
of the remaining non-contiguous areas subject to the 1996 Act 
requirement that incumbent LECs offer unbundled loop elements. We are 
not establishing default loop cost proxies for these areas because we 
are unsure that comparisons of the population densities of the 
continental states and of Alaska and other non-contiguous areas subject 
to the 1996 Act fully capture differences in loop costs. Regulatory 
authorities in those areas may seek assistance from this Commission 
should default loop cost proxies be needed before they have completed 
their investigations of the forward-looking costs of providing 
unbundled loop elements. Since our intention is to establish a ceiling 
for unbundled loop rates, we believe that it is necessary to take 
account of the variation in the data that we have used for scaling. 
While the six states that we considered appear to have based their 
rates on forward-looking economic cost pricing principles, the actual 
rates that they approved appear to reflect other factors as well. 
Furthermore, because only a small number of states have conducted such 
studies, some upward adjustment is warranted as a safety margin to 
ensure that the ceiling captures the variation in forward-looking 
economic costing prices on a state-by-state basis. We have therefore 
chosen to adjust the hybrid cost estimates upward by five percent for 
each state. A table listing the proxy ceilings on a statewide average 
basis is contained in Appendix D.

[[Page 45559]]

    548. A number of parties have opposed the use of either the 
Hatfield model or BCM. Some critics, for example, have argued that the 
models may lead to inaccurate cost estimates since these estimates 
assume that a network is built ``from scratch.'' Others have criticized 
specific procedures that have been used in the models to estimate both 
operating expenses and capital costs. As discussed below in Section 
VII.C.3., we believe that these criticisms may have merit. In a future 
rulemaking proceeding, we intend to examine in greater detail various 
forward looking economic cost models. For the purposes of setting an 
interim proxy, however, we note that the criticisms have been directed 
largely toward the absolute level of cost estimates produced by the 
models, rather than the relative cost estimates across states. Since 
our hybrid proxy ceiling explicitly scales the model cost estimates 
based on existing state decisions and uses the model results simply to 
compute relative prices, we believe that these criticisms do not apply 
in the present context.
    549. We also note that a third model, the BCM 2, could have been 
used in the construction of our interim cost proxy by simply taking the 
scaled cost estimates from three cost models instead of two. We have 
chosen not to follow this approach since parties have not had an 
opportunity to comment on the possible deficiencies of the BCM 2. For 
comparison purposes, however, we have computed the corresponding 
ceiling cost estimates, and have found that the scaled costs using the 
three model proxy are very similar to the estimated costs that were 
derived using the two models.
    550. As discussed above, we believe that cost-based rates should be 
implemented on a geographically deaveraged basis. We allow states to 
determine the number of density zones within the state, provided that 
they designate at least three zones, but require that in all cases the 
weighted average of unbundled loop prices, with weights equal to the 
number of loops in each zone, should be less than the proxy ceiling set 
for the statewide average loop cost set forth in Appendix D.
    551. As noted above, we have not yet had sufficient time to 
evaluate fully any of the cost models that have been submitted in the 
record, and our hybrid proxy is therefore intended to be used only on 
an interim basis. We believe that the methodology is consistent with 
forward-looking cost studies, but we also recognize that there may be 
situations in which forward looking loop costs will differ from 
computed costs, and accordingly, we have increased the state average 
loop costs by five percent and established the proxy as a ceiling. We 
emphasize that use of the hybrid proxy model can be superseded at any 
time by a full forward looking economic cost study that follows the 
guidelines set forth in this order. In addition, we are currently in 
the process of evaluating the more detailed cost models that have been 
submitted in the record, and will issue a further notice on the use of 
these models in the near future.
(2) Local Switching
(a) Discussion
    552. We conclude that a combination of a flat-rated charge for line 
ports, which are dedicated to a single new entrant, and either a flat-
rate or per-minute usage charge for the switching matrix and for trunk 
ports, which constitute shared facilities, best reflects the way costs 
for unbundled local switching are incurred and is therefore reasonable. 
We find that there is an insufficient basis in the record to conclude 
that we should require two flat rates for unbundled local switching 
charges as proposed by Sprint.
    553. Based on the record in this proceeding and in the LEC-CMRS 
Interconnection proceeding, we conclude that a range between 0.2 cents 
($0.002) per minute of use and 0.4 cents ($0.004) per minute of use for 
unbundled local switching is a reasonable default proxy. In setting 
this default price range, we consider the range of evidence in the 
record, and believe that the most credible studies fall at the lower 
end of this range. However, so as to minimize disruption for any state 
that has set a rate only marginally outside this range, we will 
grandfather any state that has set a rate at 0.5 cents ($0.005) per 
minute of use or less pending completion of an economic study pursuant 
to the methodology set forth in this Order.
    554. The forward-looking cost studies contained in the record 
estimate that the average cost of end-office switching ranges from 0.18 
cents ($0.0018) per minute of use to 0.35 cents ($0.0035) per minute of 
use. Maryland and Florida have adopted rates based on forward-looking 
economic cost studies that fall within the default price range we are 
adopting. NYNEX's estimate of 0.129 cents ($0.00129) per minute of use, 
in the Massachusetts proceeding, is an estimate of the marginal cost of 
end-office switching. As discussed above, we generally expect studies 
estimating marginal costs to generate estimates that are less than 
estimates derived from TELRIC-based studies. We, therefore, conclude 
that 0.2 cents ($0.002) per minute of use is a reasonable lower end of 
the price range for end-office switching.
    555. USTA's estimate of 1.3 cents ($0.013) appears to be an outlier 
that is significantly higher than the other estimates. We find that 
USTA's estimate does not represent an appropriate cost model for 
termination of traffic. USTA's estimate is based on the high end of a 
set of econometric estimates of LEC-reported cost data rather than an 
independent cost estimate, and USTA gives no explanation of why we 
should regard this as the best estimate. In addition, USTA's figure is 
derived, at least in part, from studies that attempt to measure the 
incremental cost of end-to-end use of the network for local calls, not 
the cost of local switching. Pacific Bell's study of the average LRIC 
of a call terminating under ``Feature Group B'' apparently includes 
terminations at tandem switches in addition to end-office terminations.
    556. Michigan and Illinois have adopted rates for transport and 
termination of traffic that are higher than the default price range we 
adopt for end-office switching. Michigan, which established mutual 
compensation rates of 1.5 cents ($0.015) per minute of use, did not 
review a forward-looking cost study. Illinois's 0.5 cents ($0.005) per 
minute rate for termination through the end office is just outside the 
range we are establishing. First, as previously stated, we are 
grandfathering rates of 0.5 cents ($0.005) per minute or lower. 
Further, we do not believe Illinois's rate overrides the weight of 
evidence in the record, which supports the range we are establishing.
    557. States that do not calculate the rate for the unbundled local 
switching element pursuant to a forward-looking economic cost study 
may, in the interim, set the rate so that the sum of the flat-rated 
charge for line ports and the product of the projected minutes of use 
per port and the usage-sensitive charges for switching and trunk ports, 
all divided by the projected minutes of use, does not exceed 0.4 cents 
($0.004) per minute of use and is not lower than 0.2 cents ($0.002) per 
minute of use. A state may impose a rate for unbundled local switching 
that is outside this range if it finds that a forward-looking economic 
cost study shows a higher or lower rate is justified. States that use 
our proxy and impose flat-rated charges for unbundled local switching 
should set rates so that the price falls within the range of 0.2 cents 
($0.002) per minute of use and 0.4 cents ($0.004) per minute of use if 
converted through use of a geographically disaggregated average

[[Page 45560]]

usage factor. A default price range of 0.2 cents ($0.002) per minute of 
use and 0.4 cents ($0.004) per minute of use should allow carriers the 
opportunity to recover fully their additional cost of terminating a 
call including, according to Maryland's study, a reasonable allocation 
of common costs. We observe that the most credible studies in the 
record before us fall at the lower end of this range and we encourage 
states to consider such evidence in their analysis.
    558. With respect to the argument that vertical features should be 
priced pursuant to the resale price standards, we concluded earlier 
that vertical features are part of the unbundled local switching 
element, because they are provided through the operation of hardware 
and software comprising the ``facility'' that is the switch. 
Accordingly, the pricing standard in 252(d)(1) applies to vertical 
features as part of the functionality of the switch. As previously 
discussed, allowing new entrants to purchase switching and vertical 
features as part of the local switching network element is an integral 
part of a separate option Congress has provided for new entrants to 
compete against incumbent LECs.
    559. The 1996 Act establishes different pricing standards for these 
two options available to new entrants--resale of services pursuant to 
section 251(c)(4) and unbundled elements pursuant to section 251(c)(3). 
Where the new entrant purchases vertical features as part of its 
purchase of an unbundled local switching element, the price of that 
element, including associated vertical features, should be determined 
according to section 252(d)(1). The availability of vertical services 
as part of a wholesale service offering is distinct from their 
availability as part of the local switching network element. In these 
circumstances, allowing the new entrant to combine unbundled elements 
with wholesale services is an option that is not necessary to permit 
the new entrant to enter the local market.
    560. As to Bell Atlantic's takings argument, we concluded above 
that the pricing of unbundled elements according to the just and 
reasonable standard in section 251 (c)(2) and (c)(3), and applied in 
section 252(d)(1), is not an unconstitutional taking. That analysis, 
which looks at the overall rates established by our regulations, 
applies with equal force to the pricing of unbundled local switching, 
inclusive of associated vertical features. A forward-looking economic 
cost methodology enables incumbent LECs to recover a fair return on 
their investments and Bell Atlantic has provided no specific evidence 
to the contrary. We conclude that our pricing methodology for unbundled 
local switching, inclusive of associated vertical features, provides 
just compensation to incumbent LECs.
(3) Other Elements
(a) Discussion
    561. The primary categories of network elements identified in this 
Order, other than loops and switching, are transport, signaling, and 
collocation. Our rule that dedicated facilities shall be priced on a 
flat-rated basis applies to dedicated transmission links because these 
facilities are dedicated to the use of a specific customer.
    562. For dedicated transmission links, states must use existing 
rates for interstate dedicated switched transport as a default proxy 
ceiling. We believe these rates are currently at or close to economic 
cost levels. Such rates were set based on interstate special access 
rates, which we found based on the record in the Transport proceeding 
were relatively close to costs. First Transport Order. 57 FR 54717 
(November 20, 1992); Transport Rate Structure and Pricing, Third 
Memorandum Opinion and Order on Reconsideration and Supplemental Notice 
of Proposed Rulemaking. 60 FR 2068 (January 6, 1995). These interstate 
access rates originally were based on incumbent LEC accounting costs, 
rather than a forward-looking economic cost model. Since 1991, however, 
incumbent LEC interstate access rates have been subject to price cap 
regulation, and have therefore been disengaged from embedded costs. 
Interstate access rates for dedicated transport vary by region, type of 
circuit, mileage, and other factors. For example, BellSouth's entrance 
facility charge, for transport from an IXC's point of presence to a 
BellSouth serving wire center, is $134 monthly per DS1 circuit ($5.58 
per derived voice grade circuit) and $2,100 monthly per DS3 circuit 
($3.13 per derived voice grade circuit). Dedicated transport for 10 
miles of interoffice transmission between a serving wire center and an 
end office is $325 monthly per DS1 circuit ($13.54 per derived voice 
grade circuit) and $2,950 monthly per DS3 circuit ($4.39 per derived 
voice grade circuit). Installation, multiplexing, and other transport-
related charges may also apply.
    563. Typically, transmission facilities between tandem switches and 
end offices are shared facilities. Pursuant to our rate structure 
guidelines, states may establish usage-sensitive or flat-rate charges 
to recover those costs. For shared transmission facilities between 
tandem switches and end offices, states may use as a default proxy 
ceiling the rate derived from the incumbent LEC's interstate direct 
trunked transport rates in the same manner that we derive presumptive 
price caps for tandem switched transport under our interstate price cap 
rules, using the same weighting and loading factors. Specifically, when 
the transport rate restructure was implemented, the initial levels of 
tandem-switched transmission rates were presumed reasonable if they 
were based on a weighted per-minute equivalent of direct-trunked 
transport DS1 and DS3 rates that reflects the relative number of DS1 
and DS3 circuits used in the tandem to end office links, calculated 
using a loading factor of 9000 minutes per month per voice-grade 
circuit. 47 CFR Sec. 69.111. We conclude above that interstate direct-
trunked transport rates provide a reasonable default proxy ceiling for 
unbundled dedicated transport rates. First Transport Order. Interstate 
access rates for tandem-switched transport vary by region and mileage. 
The average charge by RBOCs in Density Zone 1 for transport termination 
and one mile of switched common transport facility between a tandem 
switching office and end office equals 0.033 cents ($0.000331) per 
minute. For a five-mile facility, the average charge is 0.048 cents 
($0.000479) per minute; for a ten-mile facility, 0.066 cents 
($0.000664) per minute. When we restructured the incumbent LECs' 
interstate transport rates to be more closely aligned with cost, we 
derived presumptive tandem-switched transmission rate levels from 
direct-trunked transport rates. This proxy ceiling for shared 
transmission facilities between tandem switches and end offices, 
therefore, should be similarly derived.
    564. The United States Court of Appeals for the District of 
Columbia Circuit recently remanded our interim transport rules. The 
court concluded that the Commission had not provided sufficient 
justification for its method of establishing the rate level of the 
interstate switched access rate element for tandem switching. We do not 
believe, however, that the CompTel v. FCC decision is inconsistent with 
the rules we establish here because the decision did not address or 
criticize the Commission's determination of the rates for dedicated 
transport or tandem-switched transport links. Because our proxies do 
not involve the interstate access rate for tandem switching, they are 
not inconsistent with the court's analysis.
    565. Tandem switching also employs shared facilities. States may, 
therefore,

[[Page 45561]]

establish usage-sensitive charges to recover tandem-switching costs. 
For those states that cannot complete a forward-looking economic cost 
study within the arbitration period or cannot devote the necessary 
resources to such a review, we establish a default rate ceiling of 0.15 
cents ($0.0015) per minute of use. The additional cost of termination 
at a tandem in comparison to termination at an end office consists of 
the cost of tandem switching and the cost of tandem-switched transport 
transmission. Illinois and Maryland have adopted rates for the 
transport and termination of traffic from the tandem switch that are, 
respectively, 0.25 cents ($0.0025) per minute of use and 0.2 cents 
($0.002) per minute of use, higher than rates for termination at end 
office switches. In both instances, our default rate ceiling for tandem 
switching constitutes at least 60 percent of the implicit tandem 
switching and transport to the end office switch. We, therefore, find 
the default rate ceiling we adopt for tandem switching to be consistent 
with both Illinois's and Maryland's adopted rates for transport and 
switching of traffic from the tandem office. States that use our proxy 
and impose flat-rated charges for tandem switching should set rates so 
that the price does not exceed 0.15 cents ($0.0015) per minute of use 
if converted through use of a geographically disaggregated usage 
factor.
    566. Rates for signaling and database services should be usage-
sensitive, based either on the number of queries or the number of 
messages, with the exception of the dedicated circuits known as 
signaling links, which should be charged on a flat-rated basis. Usage 
charges of this type appear to reflect most accurately the underlying 
costs of these services. Interstate access rates for most of these 
elements have been justified using the price caps new services test, 
which roughly approximates the results of a forward-looking economic 
cost study. Amendments of Part 69 of the Commission's Rules Relating to 
the Creation of Access Charge Supplements for Open Network 
Architecture, CC Docket Nos. 89-79 and 87-313, Report and Order, Order 
on Reconsideration, and Supplemental Notice of Proposed Rulemaking. 56 
FR 33879 (July 24, 1991), modified on recon. 57 FR 37720 (August 20, 
1992). In addition, the costs of these services were forward-looking, 
in that the services were completely new and hence, by definition, used 
the best-available technology. Thus, we establish as a default proxy 
ceiling for these elements corresponding interstate access charges for 
these elements. Interstate database services consist of Line 
Information Database (LIDB) and 800 Database. Deployment of SS7 (out-
of-band signaling) has enabled LECs to offer these services. The 
average charge for RBOCs for LIDB in Density Zone 1 equals 3.34 cents 
($0.034) per database query. For elements that have not been subject to 
the new services test, states may establish proxy ceilings by 
identifying the direct costs of providing the element and adding a 
reasonable allocation of joint and common costs. Because we expect that 
the joint and common costs associated with the forward-looking cost of 
network elements are substantially less than those associated with 
traditional service-based costs, allowing a reasonable allocation is 
sufficient to protect against possible anticompetitive pricing. Absent 
any proxy, this approach will provide the most reasonable approximation 
of forward-looking economic cost.
    567. We have established rate structure rules for collocation 
elements in connection with our Expanded Interconnection proceeding. 
Expanded Interconnection with Local Telephone Company Facilities. 59 FR 
38922 (August 1, 1994). Many collocation elements established under 
section 251(c)(6) are likely to represent the same facilities, and 
should have the same cost characteristics, as existing interstate 
expanded interconnection services, and therefore we require states to 
use the same rate structure rules for those collocation elements that 
we established in the Expanded Interconnection proceeding. As a proxy 
ceiling, states may use the rates the LEC has in effect in its federal 
expanded interconnection tariff for the equivalent services. Expanded 
interconnection services are subject to the new services test, which, 
as discussed above, uses a forward-looking methodology. Although LECs 
have filed expanded interconnection tariffs, we have not yet completed 
our investigation into those tariffs. Any price for unbundled 
collocation elements set based on LEC expanded interconnection tariffs 
would therefore be subject to any modification of those tariffs that 
results from our pending investigation, and any state-imposed prices 
based on those tariffs will need to be adjusted accordingly.
    568. We find it unnecessary to specify rate structures for other 
unbundled elements. The states shall make those determinations by 
applying our general rate structure principles described above. In the 
absence of an acceptable forward-looking cost study, states may 
establish default proxy ceilings for other unbundled elements by 
identifying the direct costs of providing the element and adding a 
reasonable allocation of joint and common costs.
3. Forward-Looking Cost Model Proxies
a. Background
    569. In the NPRM, we sought comment on the use of certain generic 
cost studies. Commenters discussed several such models. These models 
include: (1) the Hatfield 2; (2) the Hatfield 2.2; (3) the BCM; (4) the 
BCM 2; and (5) the CPM.
b. Discussion
    570. We believe that the generic forward-looking costing models, in 
principle, appear best to comport with the preferred economic cost 
approach discussed previously. Several such models were placed in the 
record, including Hatfield 2, Hatfield 2.2, BCM, BCM 2, and the CPM. 
The BCM is designed to produce ``benchmark'' costs for the provision of 
basic telephone service within specific geographic regions defined by 
the Bureau of the Census as Census Block Groups. The Hatfield 2 model 
combines output from the BCM with independently-developed investment 
data to produce annual cost estimates for eleven basic network 
functions. The CPM is similar in structure to the BCM and Hatfield 2 
models, although it uses different algorithms.
    571. These models appear to offer a method of estimating the cost 
of network elements on a forward-looking basis that is practical to 
implement and that allows state commissions the ability to examine the 
assumptions and parameters that go into the cost estimates. Although 
these models were submitted too late in this proceeding for the 
Commission and parties to evaluate them fully, our initial examination 
leads us to believe that the remaining practical and empirical issues 
can be resolved in the near future. In light of the advantages of such 
a generic approach, we will further examine these generic economic cost 
models by the first quarter of 1997 to determine whether we should use 
one of them to replace the default proxies we adopt in this proceeding. 
In that event, states would have the option of setting rates in 
arbitrations on the basis of an economic cost study or by using a 
generic forward-looking cost model approved at that time.
    572. Finally, we note that Commission staff developed a model of 
the telecommunications industry that they designed to simulate industry 
demand and supply characteristics. In

[[Page 45562]]

order to encourage an open-ended discussion of the utility of the staff 
model, the Common Carrier Bureau sought comment on a working draft of 
the model that was released. Almost all parties commenting on the staff 
model urged the Commission not to rely upon the staff model as record 
evidence in this proceeding. We are not relying on the staff model to 
develop the requirements imposed by this Order.

D. Other Issues

1. Future Adjustments to Interconnection and Unbundled Element Rate 
Levels
a. Background
    573. In the NPRM, we sought comment on whether some cost index or 
price cap system would be appropriate to ensure that rates reflect 
expected changes in costs over time.
b. Discussion
    574. As noted earlier, we will continue to review our pricing 
methodology, and will make revisions as appropriate. Accordingly, there 
is no present need to establish a Commission price cap or cost index 
system to adjust interconnection and unbundled element rate levels.
2. Imputation
a. Background
    575. We sought comment in the NPRM on whether we should require an 
``imputation rule'' in establishing rates for unbundled network 
elements. An imputation rule would require that the sum of prices 
charged for a basket of unbundled network elements not exceed the 
retail price for a service offered using the same basket of elements. 
We further solicited comment on any other rules that could be adopted 
regarding pricing of unbundled network elements that would help to 
promote the pro-competitive goals of the 1996 Act.
b. Discussion
    576. Although we recognize, as several commenters observe, that an 
imputation rule could help detect and prevent price squeezes, we 
decline to impose an imputation requirement. Adoption of an imputation 
rule could force states to engage in a major rate rebalancing effort at 
this time, because it would impose substantial additional burdens on 
states at a time when they will need to devote significant resources to 
implementing the 1996 Act.
    577. In addition to our practical concerns regarding implementation 
of an imputation rule, we find that an imputation rule may not be 
necessary to achieve the pro-competitive goals of the 1996 Act. As some 
commenters, including several state commissions, suggest, competing 
providers may be able to provide basic service, at less than the cost 
of facilities and associated management, just as incumbent LECs do 
currently, by selling customers higher profit vertical or intrastate 
toll services, or through receipt of access revenues and subsidies. 
Further, the Ohio Consumers' Counsel suggest that below-cost rates may 
not be sufficiently prevalent to justify a national imputation rule. 
The Joint Consumer Advocates and the Ohio Consumers' Counsel question 
whether local service is, in fact, underpriced.
    578. We give special weight to the comments of several state 
commissions that currently employ imputation rules. These state 
commissions endorse imputation as a tool to prevent price squeezes, but 
urge us only to provide states with the flexibility to adopt imputation 
rules. We agree with those state commission commenters that argue that 
nothing in the 1996 Act prohibits individual states from adopting 
imputation rules. While an imputation rule may be pro-competitive, we 
will leave the implementation of such rules to individual states for 
the time being.
3. Discrimination
a. Background
    579. In the NPRM, we noted the different usages of the term 
``discrimination'' in the 1996 Act and the 1934 Act. Sections 251 and 
252 require that interconnection and unbundled element rates be 
``nondiscriminatory.'' Similarly, section 251(c)(4) requires that, in 
making resale available, carriers not impose ``discriminatory 
conditions or limitations on resale.'' Finally, section 252(e) provides 
that states may reject a negotiated agreement or a portion of the 
agreement if it ``discriminates'' against a carrier not a party to the 
agreement and section 252(i) requires incumbent LECs to ``make 
available any interconnection, service, or network element provided 
under an agreement * * * to which it is a party to any requesting 
telecommunications carrier upon the same terms and conditions.'' In 
contrast, section 202(a) of the 1934 Act provides that ``(i)t shall be 
unlawful for any common carrier to make any unjust or unreasonable 
discrimination in charges * * * for * * * like communication service.''
    580. We sought comment on ``the meaning of the term 
`nondiscriminatory' in the 1996 Act compared with the phrase 
`unreasonable discrimination' in the 1934 Act.'' We asked specifically 
whether Congress intended to prohibit all price discrimination, 
including measures such as density zone pricing or volume and term 
discounts, by choosing the word ``nondiscriminatory.'' We further asked 
whether sections 251 and 252 could be interpreted to prohibit only 
unjust or unreasonable discrimination. Finally, we sought comment on 
whether the 1996 Act prohibited carriers from charging different rates 
to parties that are not similarly situated.
b. Discussion
    581. We conclude that the term ``nondiscriminatory'' in the 1996 
Act is not synonymous with ``unjust and unreasonable discrimination'' 
in section 202(a), but rather is a more stringent standard. Finding 
otherwise would fail to give meaning to Congress's decision to use 
different language. We agree, however, with those parties that argue 
that cost-based differences in rates are permissible under sections 251 
and 252.
    582. Section 252(d)(1), for example, requires carriers to base 
interconnection and network element charges on costs. Where costs 
differ, rate differences that accurately reflect those differences are 
not discriminatory. This is consistent with the economic definition of 
price discrimination, which is ``the practice of selling the same 
product at two or more prices where the price differences do not 
reflect cost differences * * * An important feature of the economic 
definition of price discrimination is that it occurs not only when 
prices are different in the presence of similar costs but also when the 
prices are the same and the costs of supplying customers are 
different.'' As one economist has recognized, differential pricing is 
``one of the most prevalent forms of marketing practices'' of 
competitive enterprises. Strict application of the term 
``nondiscriminatory'' as urged by those commenters who argue that 
prices must be uniform would itself be discriminatory according to the 
economic definition of price discrimination. If the 1996 Act is read to 
allow no price distinctions between companies that impose very 
different interconnection costs on LECs, competition for all 
competitors, including small companies, could be impaired. Thus, we 
find that price differences, such as volume and term discounts, when 
based upon legitimate variations in costs are permissible under the 
1996 Act, if justified.
    583. On the other hand, price differences based not on cost 
differences but on such considerations as competitive relationships, 
the

[[Page 45563]]

technology used by the requesting carrier, the nature of the service 
the requesting carrier provides, or other factors not reflecting costs, 
the requirements of the Act, or applicable rules, would be 
discriminatory and not permissible under the new standard. Such 
examples include the imposition of different rates, terms and 
conditions based on the fact that the competing provider does or does 
not compete with the incumbent LEC, or offers service via wireless 
rather than wireline facilities. We find that it would be unlawfully 
discriminatory, in violation of sections 251 and 252, if an incumbent 
LEC were to charge one class of interconnecting carriers, such as CMRS 
providers, higher rates for interconnection than it charges other 
carriers, unless the different rates could be justified by differences 
in the costs incurred by the incumbent LEC.
    584. State regulations permitting non-cost based discriminatory 
treatment are prohibited by the 1996 Act. This conclusion is consistent 
with both the letter and the spirit of the 1996 Act and our 
determination that the pricing for interconnection, unbundled elements, 
and transport and termination of traffic should not vary based on the 
identity or classification of the interconnector.

VIII. Resale

    585. Section 251(c)(4) imposes a duty on incumbent LECs to offer 
certain services for resale at wholesale rates. Specifically, section 
251(c)(4) requires an incumbent LEC:
    (A) to offer for resale at wholesale rates any telecommunications 
service that the carrier provides at retail to subscribers who are not 
telecommunications carriers; and
    (B) not to prohibit, and not to impose unreasonable or 
discriminatory conditions or limitations on, the resale of such 
telecommunications service, except that a State commission may, 
consistent with regulations prescribed by the Commission under this 
section, prohibit a reseller that obtains at wholesale rates a 
telecommunications service that is available at retail only to a 
category of subscribers from offering such service to a different 
category of subscribers.
    586. The requirement that incumbent LECs offer services at 
wholesale rates is described in section 252(d)(3), which sets forth the 
pricing standard that states must use in arbitrating agreements and 
reviewing rates under BOC statements of generally available terms and 
conditions:
    [A] State commission shall determine wholesale rates on the basis 
of retail rates charged to subscribers for the telecommunications 
service requested, excluding the portion thereof attributable to any 
marketing, billing, collection, and other costs that will be avoided by 
the local exchange carrier.
    Section VIII.A. of this Order discusses the scope of section 
251(c)(4). Section VIII.B. addresses the determination of ``wholesale 
rates.'' Section VIII.C. considers the issue of conditions or 
limitations on resale under this section, Section VIII.D. discusses the 
resale obligations under section 251(b)(1), and Section VIII.E. 
considers the application of access charges in the resale environment.

A. Scope of Section 251(c)(4)

1. Background
    587. In the NPRM, we sought comment generally on the scope of 
section 251(c)(4).
2. Discussion
    588. Section 251(c)(4)(A) imposes on all incumbent LECs the duty to 
offer for resale ``any telecommunications service that the carrier 
provides at retail to subscribers who are not telecommunications 
carriers.'' We conclude that an incumbent LEC must establish a 
wholesale rate for each retail service that: (1) meets the statutory 
definition of a ``telecommunications service;'' and (2) is provided at 
retail to subscribers who are not ``telecommunications carriers.'' We 
thus find no statutory basis for limiting the resale duty to basic 
telephone services, as some suggest.
    589. We need not prescribe a minimum list of services that are 
subject to the resale requirement. State commissions, incumbent LECs, 
and resellers can determine the services that an incumbent LEC must 
provide at wholesale rates by examining that LEC's retail tariffs. The 
1996 Act does not require an incumbent LEC to make a wholesale offering 
of any service that the incumbent LEC does not offer to retail 
customers. State commissions, however, may have the power to require 
incumbent LECs to offer specific intrastate services.
    590. Exchange access services are not subject to the resale 
requirements of section 251(c)(4). The vast majority of purchasers of 
interstate access services are telecommunications carriers, not end 
users. It is true that incumbent LEC interstate access tariffs do not 
contain any limitation that prevents end users from buying these 
services, and that end users do occasionally purchase some access 
services, including special access, Feature Group A, and certain 
Feature Group D elements for large private networks. Despite this fact, 
we conclude that the language and intent of section 251 clearly 
demonstrates that exchange access services should not be considered 
services an incumbent LEC ``provides at retail to subscribers who are 
not telecommunications carriers'' under section 251(c)(4). We note that 
virtually all commenters in this proceeding agree, or assume without 
stating, that exchange access services are not subject to the resale 
requirements of section 251(c)(4).
    591. We find several compelling reasons to conclude that exchange 
access services should not be subject to resale requirements. First, 
these services are predominantly offered to, and taken by, IXCs, not 
end users. Part 69 of our rules defines these charges as ``carrier's 
carrier charges,'' and the specific part 69 rules that describe each 
interstate switched access element refer to charges assessed on 
``interexchange carriers'' rather than end users. The mere fact that 
fundamentally non-retail services are offered pursuant to tariffs that 
do not restrict their availability, and that a small number of end 
users do purchase some of these services, does not alter the essential 
nature of the services. Moreover, because access services are designed 
for, and sold to, IXCs as an input component to the IXC's own retail 
services, LECs would not avoid any ``retail'' costs when offering these 
services at ``wholesale'' to those same IXCs. Congress clearly intended 
section 251(c)(4) to apply to services targeted to end user 
subscribers, because only those services would involve an appreciable 
level of avoided costs that could be used to generate a wholesale rate. 
Furthermore, as explained in the following paragraph, section 251(c)(4) 
does not entitle subscribers to obtain services at wholesale rates for 
their own use. Permitting IXCs to purchase access services at wholesale 
rates for their own use would be inconsistent with this requirement.
    592. We conclude that section 251(c)(4) does not require incumbent 
LECs to make services available for resale at wholesale rates to 
parties who are not ``telecommunications carriers'' or who are 
purchasing service for their own use. The wholesale pricing requirement 
is intended to facilitate competition on a resale basis. Further, the 
negotiation process established by Congress for the implementation of 
section 251 requires incumbent LECs to negotiate agreements, including 
resale agreements, with ``requesting telecommunications carrier or 
carriers,'' not with end users or other entities. We further discuss 
the definition of

[[Page 45564]]

``telecommunications carrier'' in Section IX. of the Order.
    593. With regard to independent public payphone providers, however, 
we agree with the American Public Communication Council's argument that 
such carriers are not ``telecommunications carriers'' under section 
3(44). We therefore also agree with the American Public Communications 
Council's contention that the services independent public payphone 
providers obtain from incumbent LECs are telecommunications services 
that incumbent LECs provide ``at retail to subscribers who are not 
telecommunications carriers'' and that such services should be 
available at wholesale rates to telecommunications carriers. Because we 
conclude that independent public payphone providers are not 
``telecommunications carriers,'' however, we conclude that incumbent 
LECs need not make available service to independent public payphone 
providers at wholesale rates. This is consistent with our finding that 
wholesale offerings must be purchased for the purpose of resale by 
``telecommunications carriers.''
    594. We conclude that the plain language of the 1996 Act requires 
that the incumbent LEC make available at wholesale rates retail 
services that are actually composed of other retail services, i.e., 
bundled service offerings. Section 251(c)(4) states that the incumbent 
LEC must offer for resale ``any telecommunications service'' provided 
at retail to subscribers who are not telecommunications carriers. The 
resale provision of the 1996 Act does not contain any language 
exempting services if those services can be duplicated or approximated 
by combining other services. On the other hand, section 251(c)(4) does 
not impose on incumbent LECs the obligation to disaggregate a retail 
service into more discrete retail services. The 1996 Act merely 
requires that any retail services offered to customers be made 
available for resale.

B. Wholesale Pricing

1. Background
    595. As discussed above, section 251(c)(4) requires incumbent LECs 
to offer at ``wholesale rates'' any telecommunications services that 
the carrier provides at retail to subscribers who are not 
telecommunications carriers. Section 252(d)(3) establishes the standard 
that states must use in determining wholesale rates in arbitrations or 
in reviewing wholesale rates under BOC statements of generally 
available terms and conditions. Specifically, section 252(d)(3) 
provides that wholesale rates shall be set ``on the basis of retail 
rates charged to subscribers for the telecommunications service 
requested, excluding the portion thereof attributable to any marketing, 
billing, collection, and other costs that will be avoided by the local 
exchange carrier.''
    596. In the NPRM, we generally sought comment on the meaning of the 
term ``wholesale rates'' in section 251(c)(4). We asked if we could and 
should establish principles for the states to apply in order to 
determine wholesale prices in an expeditious and consistent manner. We 
also sought comment on whether we should issue rules for states to 
apply in determining avoided costs. We stated that we could, for 
example, determine that states are permitted under the 1996 Act to 
direct incumbent LECs to quantify their costs for any marketing, 
billing, collection, and similar activities that are associated with 
offering retail, but not wholesale, services. We also sought comment on 
whether avoided costs should include a share of common costs and 
general overhead or ``markup'' assigned to such costs. LECs would then 
reduce retail rates by this amount, offset by any portion of expenses 
that they incur in the provision of wholesale rates. We noted that this 
approach appeared to be consistent with the 1996 Act, but would create 
certain administrative difficulties because all of the information 
regarding costs is under the control of the incumbent LECs. We also 
asked for comment on several alternative approaches. For example, we 
asked whether we could establish a uniform set of presumptions 
regarding avoided costs that states could adopt and that would apply in 
the absence of a quantification of such costs by incumbent LECs. 
Additionally, we asked whether we should identify specific accounts or 
portions of accounts in the Commission's Uniform System of Accounts 
(``USOA'') that the states should include as avoided costs. We also 
requested comment on whether we should establish rules that allocate 
avoided costs across services. We asked whether incumbent LECs should 
be allowed, or required, to vary the percentage wholesale discounts 
across different services based on the degree the avoided costs relate 
to those services. Finally, we asked whether we should adopt a uniform 
percentage discount off of the retail rate of each service.
2. Discussion
    597. Resale will be an important entry strategy for many new 
entrants, especially in the short term when they are building their own 
facilities. Further, in some areas and for some new entrants, we expect 
that the resale option will remain an important entry strategy over the 
longer term. Resale will also be an important entry strategy for small 
businesses that may lack capital to compete in the local exchange 
market by purchasing unbundled elements or by building their own 
networks. In light of the strategic importance of resale to the 
development of competition, we conclude that it is especially important 
to promulgate national rules for use by state commissions in setting 
wholesale rates. For the same reasons discussed in Section II.D of the 
Order, we believe that we have legal authority under the 1996 Act to 
articulate principles that will apply to the arbitration or review of 
wholesale rates. We also believe that articulating such principles will 
promote expeditious and efficient entry into the local exchange market. 
Clear resale rules will create incentives for parties to reach 
agreement on resale arrangements in voluntary negotiations. Clear rules 
will also aid states in conducting arbitrations that will be 
administratively workable and will produce results that satisfy the 
intent of the 1996 Act. The rules we adopt and the determinations we 
make in this area are crafted to achieve these purposes. We also note 
that clear resale rules should minimize regulatory burdens and 
uncertainty for all parties, including small entities and small 
incumbent LECs.
    598. The statutory pricing standard for wholesale rates requires 
state commissions to (1) identify what marketing, billing, collection, 
and other costs will be avoided by incumbent LECs when they provide 
services at wholesale; and (2) calculate the portion of the retail 
prices for those services that is attributable to the avoided costs. 
Our rules provide two methods for making these determinations. The 
first, and preferred, method requires state commissions to identify and 
calculate avoided costs based on avoided cost studies. The second 
method allows states to select, on an interim basis, a discount rate 
from within a default range of discount rates adopted by this 
Commission. They may then calculate the portion of a retail price that 
is attributable to avoided costs by multiplying the retail price by the 
discount rate.

[[Page 45565]]

    599. We adopt a minimum set of criteria for avoided cost studies 
used to determine wholesale discount rates. The record before us 
demonstrates that avoided cost studies can produce widely varying 
results, depending in large part upon how the proponent of the study 
interprets the language of section 252(d)(3). The criteria we adopt are 
designed to ensure that states apply consistent interpretations of the 
1996 Act in setting wholesale rates based on avoided cost studies which 
should facilitate swift entry by national and regional resellers, which 
may include small entities. At the same time, our criteria are intended 
to leave the state commissions broad latitude in selecting costing 
methodologies that comport with their own ratemaking practices for 
retail services. Thus, for example, our rules for identifying avoided 
costs by USOA expense account are cast as rebuttable presumptions, and 
we do not adopt as presumptively correct any avoided cost model.
    600. Based on the comments filed in this proceeding and on our 
analysis of state decisions setting wholesale discounts, we adopt a 
default range of rates that will permit a state commission to select a 
reasonable default wholesale rate between 17 and 25 percent below 
retail rate levels. A default wholesale discount rate shall be used if: 
(1) an avoided cost study that satisfies the criteria we set forth 
below does not exist; (2) a state commission has not completed its 
review of such an avoided cost study; or (3) a rate established by a 
state commission before release of this Order is based on a study that 
does not comply with the criteria described in the following section. A 
state commission must establish wholesale rates based on avoided cost 
studies within a reasonable time from when the default rate was 
selected. This approach will enable state commissions to complete 
arbitration proceedings within the statutory time frames even if it is 
infeasible to conduct full-scale avoided cost studies that comply with 
the criteria described below for each incumbent LEC.
a. Criteria for Cost Studies
    601. There has been considerable debate on the record in this 
proceeding and before the state commissions on whether section 
252(d)(3) embodies an ``avoided'' cost standard or an ``avoidable'' 
cost standard. We find that ``the portion [of the retail rate] * * * 
attributable to costs that will be avoided'' includes all of the costs 
that the LEC incurs in maintaining a retail, as opposed to a wholesale, 
business. In other words, the avoided costs are those that an incumbent 
LEC would no longer incur if it were to cease retail operations and 
instead provide all of its services through resellers. Thus, we reject 
the arguments of incumbent LECs and others who maintain that the LEC 
must actually experience a reduction in its operating expenses for a 
cost to be considered ``avoided'' for purposes of section 252(d)(3). We 
do not believe that Congress intended to allow incumbent LECs to 
sustain artificially high wholesale prices by declining to reduce their 
expenditures to the degree that certain costs are readily avoidable. We 
therefore interpret the 1996 Act as requiring states to make an 
objective assessment of what costs are reasonably avoidable when a LEC 
sells its services wholesale. We note that Colorado, Georgia, Illinois, 
New York, and Ohio commissions have all interpreted the 1996 Act in 
this manner.
    602. We find that, under this ``reasonably avoidable'' standard 
discussed above, an avoided cost study must include indirect, or 
shared, costs as well as direct costs. We agree with MCI, AT&T, and the 
California, Illinois, Ohio, Colorado, and Georgia commissions that some 
indirect or shared costs are avoidable and likely to be avoided when a 
LEC provides retail services to a reseller instead of to the end user. 
This is because indirect or shared costs, such as general overheads, 
support all of the LEC's functions, including marketing, sales, billing 
and collection, and other avoided retail functions. Therefore, a 
portion of indirect costs must be considered ``attributable to costs 
that will be avoided'' pursuant to section 252(d)(3). It is true that 
expenses recorded in indirect or shared expense accounts will continue 
to be incurred for wholesale operations. It is also true, however, that 
the overall level of indirect expenses can reasonably be expected to 
decrease as a result of a lower level of overall operations resulting 
from a reduction in retail activity.
    603. A portion of contribution, profits, or mark-up may also be 
considered ``attributable to costs that will be avoided'' when services 
are sold wholesale. MCI's model makes this attribution by means of a 
calculation that applies the same mark-up to wholesale services as to 
retail services. The Illinois Commission achieved a similar effect by 
removing a pro rata portion of contribution from the retail rate for 
each service. In AT&T's model, the portion of return on investment 
(profits) that was attributable to assets used in avoided retail 
activities was treated as an avoided cost. We find that these 
approaches are consistent with the 1996 Act.
    604. An avoided cost study may not calculate avoided costs based on 
non-cost factors or policy arguments, nor may it make disallowances for 
reasons not provided for in section 252(d)(3). The language of section 
252(d)(3) makes no provision for selecting a wholesale discount rate on 
policy grounds. We therefore reject NCTA's argument that discount rates 
should be ten percent or less in order to avoid discouraging 
facilities-based competition, as well as AT&T's suggestion that 
wholesale discount rates should be set at levels that ensure the 
viability of the reseller's business. We also reject, for example, 
MCI's assertion that no external relations or research and development 
costs should be allowed in wholesale rates because the activities 
represented by those costs are contrary to the interests of the LEC 
competitors that purchase wholesale services. Our analysis also 
precludes a state commission from adopting AT&T's suggestion that an 
increment should be added to the base discount rate to compensate 
resellers for alleged deficiencies in the provisioning of services.
    605. The 1996 Act requires that wholesale rates be based on 
existing retail rates, and thus clearly precludes use of a ``bottom 
up'' TSLRIC study to establish wholesale rates that are not related to 
the rates for the underlying retail services. We thus reject the 
suggestions of those parties that ask us to require use of TSLRIC to 
set wholesale rates. The 1996 Act does not, however, preclude use of 
TSLRIC cost studies to identify the portion of a retail rate that is 
attributable to avoided retail costs. TSLRIC studies would be entirely 
appropriate in states where the retail rates were established using a 
TSLRIC method. For example, the Illinois Commission calculated its 
wholesale rate using an avoided cost formula and long run incremental 
cost studies. Embedded cost studies, such as the studies used by the 
Georgia Commission, may also be used to identify avoided costs. 
Ideally, a state would use a study methodology that is consistent with 
the manner in which it sets retail rates.
    606. We neither prohibit nor require use of a single, uniform 
discount rate for all of an incumbent LEC's services. We recognize that 
a uniform rate is simple to apply, and avoids the need to allocate 
avoided costs among services. Therefore, our default wholesale discount 
is to be applied uniformly. On the other hand, we also agree with 
parties who observe that avoided costs

[[Page 45566]]

may, in fact, vary among services. Accordingly, we allow a state to 
approve nonuniform wholesale discount rates, as long as those rates are 
set on the basis of an avoided cost study that includes a demonstration 
of the percentage of avoided costs that is attributable to each service 
or group of services.
    607. All costs recorded in accounts 6611 (product management), 6612 
(sales), 6613 (product advertising) and 6623 (customer services) are 
presumed to be avoidable. The costs in these accounts are the direct 
costs of serving customers. All costs recorded in accounts 6621 (call 
completion services) and 6622 (number services) are also presumed 
avoidable, because resellers have stated they will either provide these 
services themselves or contract for them separately from the LEC or 
from third parties. These presumptions regarding accounts 6611-6613 and 
6621-6623 may be rebutted if an incumbent LEC proves to the state 
commission that specific costs in these accounts will be incurred with 
respect to services sold at wholesale, or that costs in these accounts 
are not included in the retail prices of the resold services.
    608. General support expenses (accounts 6121-6124), corporate 
operations expenses (accounts 6711, 6712, 6721-6728), and 
telecommunications uncollectibles (account 5301) are presumed to be 
avoided in proportion to the avoided direct expenses identified in the 
previous paragraph. Expenses recorded in these accounts are tied to the 
overall level of operations in which an incumbent LEC engages. Because 
the advent of wholesale operations will reduce the overall level of 
operations--for example, staffing should decrease because customer 
inquiries and billing and collection activity will decrease--overhead 
and support expenses are in part avoided. We select the revenue offset 
account of 5301 rather than accounts 5300 or 6790 because account 5301 
most directly represents overheads attributable to the services being 
resold.
    609. Plant-specific and plant non-specific expenses (other than 
general support expenses) are presumptively not avoidable.
    610. In the case of carriers designated as Class B under section 
32.11 of our rules that use certain summary accounts in lieu of 
accounts designated in this subsection of the Order, our avoided cost 
study criteria shall apply to the relevant summary account in its 
entirety.
b. Default Range of Wholesale Discount Rates
    611. Parties to this proceeding present evidence or arguments 
supporting wholesale discount rates ranging from 4.76 percent to 55 
percent:

------------------------------------------------------------------------
                                                      Percent           
------------------------------------------------------------------------
Sprint/United Telephone study:                                          
  Simple Access service..................  4.76                         
  Other services.........................  7.19                         
NCTA.....................................  10.0                         
Comcast..................................  10.0                         
Massachusetts Attorney General...........  25.0                         
ACTA.....................................  25.0                         
MCI Model................................  25.6-33.2                    
Telecommunications Resellers Ass'n.......  30.0-50.0                    
AT&T Model...............................  23.05-55.52                  
------------------------------------------------------------------------

    612. States applying wholesale pricing standards similar to the 
standards in section 252(d)(3) have set the following wholesale 
discounts:

------------------------------------------------------------------------
                                                                Percent 
------------------------------------------------------------------------
California:                                                             
  PacTel:                                                               
    Business................................................       17.0 
    Residential.............................................       10.0 
  GTE:                                                                  
    Business................................................       12.0 
    Residential.............................................        7.0 
Colorado:                                                               
  Residential...............................................        9.0 
  Business..................................................       16.0 
  Toll Services.............................................       30.0 
  Central Office-Based Features.............................       50.0 
  All other services........................................       18.0 
Georgia:                                                                
  Residential...............................................       20.3 
  Business..................................................       17.3 
Illinois....................................................       20.07
New York:                                                               
  NYNEX:                                                                
    Business................................................       17.0 
    Residential.............................................       11.0 
  Rochester Telephone.......................................       13.5 
------------------------------------------------------------------------

    613. We find unpersuasive various arguments presented by parties at 
the lower and higher ends of the range of possible discounts. The 
Sprint/United Telephone study produces unreasonably low measures of 
avoided costs because the study considers only avoided direct expenses 
in five accounts. As explained above, we interpret the statutory 
language providing for a wholesale price that excludes the ``portion 
[of a retail rate] attributable to any marketing, billing, collection, 
and other costs that will be avoided'' to include indirect as well as 
direct costs. The proposals of NCTA and Comcast for a maximum discount 
of 10 percent are premised on the view that any greater discount would 
unduly discourage facilities-based competition. Section 252(d)(3), 
however, requires wholesale prices to be set based on avoided costs, 
not on any policy preference for facilities-based competition. For the 
same statutory reason, we reject as inconsistent with section 252(d)(3) 
the policy arguments of the Telecommunications Resellers Association 
and AT&T that we should establish national wholesale discounts at 
levels that will ensure that resale of local exchange services is a 
viable business.
    614. We find AT&T's model unsuitable for purposes of establishing 
in this proceeding a range for default wholesale discount rates. The 
AT&T model does in many respects satisfy the general criteria we 
establish above for avoided cost studies. The model, however, 
incorporates numerous assumptions, cost allocation factors, and 
studies, and because AT&T submitted its model with its reply comments, 
and other parties have not analyzed the model in detail. We find that 
we would need to develop a more complete record on the AT&T model 
before deciding whether to endorse it. We do not, however, preclude a 
state commission from considering in a wholesale rate proceeding 
evidence developed using this model.
    615. We find that we can use MCI's model, with some modifications, 
along with the results of certain state proceedings, to establish a 
range of rates that would produce an acceptable default wholesale 
discount rate that reasonably approximates the amount of avoided costs 
that should be subtracted from the retail rate. A default rate is to be 
used only in three instances: (1) in a state arbitration proceeding if 
an avoided cost study that satisfies the criteria we set forth above 
does not exist; (2) where a state has not completed its review of such 
an avoided cost study; (3) where a rate established by a state before 
the release date of this Order is based on a study that does not comply 
with the criteria described in the previous section. We emphasize that 
the default rate is to be used as an interim measure only, and should 
be replaced with an avoided cost study within a reasonable time. The 
MCI model is a reasonable attempt at estimating avoided cost in 
accordance with section 252(d)(3) using only publicly-available data. 
We find, however, that we should modify certain features of the model.
    616. First, MCI treats account 6722 (external relations) and 
account 6727 (research and development) as avoidable costs. MCI argues 
that purchasers of wholesale services are competing with LECs and, 
therefore, should not be forced to fund regulatory

[[Page 45567]]

activities reflected in account 6722. MCI claims that research and 
development are not of practical use for the services that resellers 
will purchase. As explained above, this type of disallowance is not 
contemplated by the avoided cost standard of section 252(d)(3). We 
therefore adjust the model to treat these costs in the same manner as 
other overhead expense accounts.
    617. Second, MCI treats a number of accounts as ``other avoided 
costs'' on the grounds that the expenses in those accounts are not 
relevant to the provision of telecommunications services that an 
incumbent LEC currently provides. Based on this rationale, MCI excludes 
account 6113 (aircraft expense), account 6341 (large PBX expense), 
account 6511 (property held for future telecommunications use expense), 
account 6351 (public telephone terminal equipment expense), account 
6512 (provisioning expense), account 6562 (depreciation expense for 
property held for future telecommunications use), and account 6564 
(amortization expense, intangible). Public telephone terminal equipment 
expense and large PBX expense are not ``avoided'' precisely because 
they are unrelated to the retail services being discounted. We would 
not expect these expenses to be included in retail service rates for 
resold services; but if these expenses were included in retail rates, 
they would not be avoided when the services are purchased by resellers. 
The rest of MCI's ``other'' accounts contain costs that support all of 
the telecommunications services offered by the company. MCI has not 
shown that any of these costs are either reduced or eliminated when 
services are sold at wholesale. We, therefore, adjust the MCI model so 
as not to treat these accounts as avoidable costs.
    618. Third, MCI treats accounts 6611 (product management), 6612 
(sales), 6613 (product advertising), and 6623 (customer services) as 
costs that are entirely avoided with respect to services purchased at 
wholesale. We agree that a large portion of the expenses in these 
accounts is avoided when service is sold at wholesale. We also agree, 
however, with parties that argue that some expenses in these accounts 
will continue to be incurred with respect to wholesale products and 
customers, and that some new expenses may be incurred in addressing the 
needs of resellers as customers. No party in this proceeding has 
suggested a specific adjustment to the MCI model that would account for 
these costs of the wholesale operation. We note that, in their own 
proceedings, several states have made varying estimates concerning the 
level of wholesale-related expenses in these accounts. Colorado, for 
example, estimated that none of the costs in accounts 6611-6613 would 
relate to wholesale services, and that only five percent of the costs 
in account 6623 would be incurred in a wholesale operation. The Georgia 
Commission, on the other hand, decided that 25 percent of sales and 
product advertising expenses would continue to be incurred in the 
wholesale operation. Given the lack of evidence, and the wide range of 
estimates that have been made by these states, we find it reasonable to 
assume, for purposes of determining a default range of wholesale 
discount rates, that ten percent of costs in accounts 6611, 6612, 6613, 
and 6623 are not avoided by selling services at wholesale.
    619. Fourth, MCI uses a complex formula to calculate the portions 
of overhead and general support expense that are attributable to 
avoided costs. We find that this formula is constructed in a way that 
tends to inflate the results of the calculation. We have, therefore, 
substituted a more straightforward approach in which we apply to each 
indirect expense category the ratio of avoided direct expense to total 
expenses. We also identify a slightly different list of accounts 
representing indirect costs than that proposed by MCI.
    620. With the modifications described above, and using actual 1995 
data, MCI's model produces the following results for the RBOCs and GTE:

------------------------------------------------------------------------
                                                                Percent 
------------------------------------------------------------------------
U S West.....................................................      18.80
GTE..........................................................      18.81
BellSouth....................................................      19.20
Bell Atlantic................................................      19.99
SBC..........................................................      20.11
NYNEX........................................................      21.31
Pacific......................................................      23.87
Ameritech....................................................      25.98
------------------------------------------------------------------------

    621. We also take into account the experience of those state 
commissions, Illinois and Georgia, that have undertaken or approved 
detailed avoided cost studies under the pricing standard of section 
252(d)(3) of the 1996 Act. Applying the statutory standard to the 
examination of significant cost studies, those commissions derived 
average wholesale discounts of 18.74 percent and 20.07 percent. We find 
that these decisions present evidence of an appropriate wholesale 
discount that should be given more weight than state commission 
decisions that have set their discounts under other pricing standards 
or only on an interim basis.
    622. Accordingly, based on the record before us, we establish a 
range of default discounts of 17-25 percent that is to be used in the 
absence of an avoided cost study that meets the criteria set forth 
above. A state commission that has not set wholesale prices based on 
avoided cost studies that meet the criteria set forth above as of the 
release date of this Order shall use a default wholesale discount rate 
between 17 and 25 percent. A state should articulate the basis for 
selecting a particular discount rate. If this default discount rate is 
used, the state commission must establish wholesale rates based on 
avoided cost studies within a reasonable time. The avoided cost study 
must comply with the criteria for avoided cost studies described above. 
A state commission may submit an avoided cost study to this Commission 
for a determination of whether it complies with these criteria. If a 
party (either a reseller or an incumbent LEC) believes that a state 
commission has failed to act within a reasonable period of time, that 
party may file a petition for declaratory ruling with this Commission, 
asking us to determine whether the state has failed to comply with this 
rule. We will, in making such determinations, consider the particular 
circumstances in the state involved. If a state commission has adopted 
as of the release date of this Order an interim wholesale pricing 
decision that relies on an avoided cost study that meets the criteria 
set forth above, the state commission may continue to require an 
incumbent LEC to offer services for resale under such interim wholesale 
prices in lieu of the default discount range, so long as the state 
commission's interim pricing rules are fully enforceable by resellers 
and followed by a final decision within a reasonable period of time 
that adopts an avoided cost study that meets the criteria set forth 
above.
    623. We select the 17 to 25 percent range of default discounts 
based on our evaluation of the record. The adjusted results of the MCI 
model taken together with the results of those state proceedings 
discussed above that indicated they applied the statutory standard 
produces, a range between 18.74 and 25.98 percent. A majority of these 
wholesale discount rates fall between 18.74 and 21.11 percent. Other 
state commissions, such as California and New York, that have employed 
avoided cost studies have produced wholesale discount rates somewhat 
below the low end of this range. Furthermore, it has been argued that 
smaller incumbent LECs' avoided costs are likely to be less than those 
of the larger incumbent LECs, whose data was used by MCI. Therefore, to 
allow for

[[Page 45568]]

these considerations, we select 17 percent as the lower end of the 
range. We select 25 percent as the top of the range because it 
approximates the top of the range of results produced by the modified 
MCI model. This range gives state commissions flexibility in addressing 
circumstances of incumbent LECs serving their states and permits resale 
to proceed until such time as the state commission can review a fully-
compliant avoided cost study.
    624. We have considered the economic impact of our rules in this 
section on small incumbent LECs. For example, Bay Springs, et al., 
argues that national wholesale pricing rules will insufficiently 
consider operational differences between small and large incumbent 
LECs. We take this into consideration in setting the default discount 
rate and in requiring state commissions to perform carrier-specific 
avoided cost studies within a reasonable period of time that will 
reflect carrier-to-carrier differences. We believe, however, that the 
procompetitive goals of the 1996 Act require us to establish a default 
discount rate for state commissions to use in the absence of avoided 
cost studies that comply with the criteria we set forth above. The 
presumptions we establish in conducting avoided cost studies regarding 
the avoidability of certain expenses may be rebutted by evidence that 
certain costs are not avoided, which should minimize any economic 
impact of our decisions on small incumbent LECs. We also note that 
certain small incumbent LECs are not subject to our rules under section 
251(f)(1) of the 1996 Act, unless otherwise determined by a state 
commission, and certain other small incumbent LECs may seek relief from 
their state commissions from our rules under section 251(f)(2) of the 
1996 Act.

C. Conditions and Limitations

    625. Section 251(c)(4) requires incumbent LECs to make their 
services available for resale without unreasonable or discriminatory 
conditions or limitations. This portion of this Order addresses various 
issues relating to conditions or limitations on resale. It first 
discusses restrictions, generally, in Section VIII.C.1. Next, it turns 
to promotional and discounted offerings and the conditions that may 
attach to such offerings in Section VIII.C.2., and then to refusals to 
resell residential and below-cost services in Section VIII.C.3. 
Limitations on the categories of customers to whom a reseller may sell 
incumbent LEC services are discussed in VIII.C.4. Resale restrictions 
in the form of withdrawal of service are discussed in VIII.C.5. 
Finally, Section VIII.C.6. discusses resale restrictions relating to 
provisioning.
1. Restrictions, Generally, and Burden of Proof
 a. Background
    626. In the NPRM, we asked whether incumbent LECs should have the 
burden of proving that restrictions on resale are reasonable and 
nondiscriminatory. We stated our belief that, given the pro-competitive 
goals of the 1996 Act and the view that restrictions and conditions 
were likely to be evidence of an exercise of market power, the range of 
permissible restrictions should be quite narrow.
 b. Discussion
    627. We conclude that resale restrictions are presumptively 
unreasonable. Incumbent LECs can rebut this presumption, but only if 
the restrictions are narrowly tailored. Such resale restrictions are 
not limited to those found in the resale agreement. They include 
conditions and limitations contained in the incumbent LEC's underlying 
tariff. As we explained in the NPRM, the ability of incumbent LECs to 
impose resale restrictions and conditions is likely to be evidence of 
market power and may reflect an attempt by incumbent LECs to preserve 
their market position. In a competitive market, an individual seller 
(an incumbent LEC) would not be able to impose significant restrictions 
and conditions on buyers because such buyers turn to other sellers. 
Recognizing that incumbent LECs possess market power, Congress 
prohibited unreasonable restrictions and conditions on resale. We, as 
well as state commissions, are unable to predict every potential 
restriction or limitation an incumbent LEC may seek to impose on a 
reseller. Given the probability that restrictions and conditions may 
have anticompetitive results, we conclude that it is consistent with 
the procompetitive goals of the 1996 Act to presume resale restrictions 
and conditions to be unreasonable and therefore in violation of section 
251(c)(4). This presumption should reduce unnecessary burdens on 
resellers seeking to enter local exchange markets, which may include 
small entities, by reducing the time and expense of proving 
affirmatively that such restrictions are unreasonable. We discuss 
several specific restrictions below including certain restrictions for 
which we conclude the presumption of unreasonableness shall not apply. 
We also discuss certain restrictions that we will presume are 
reasonable.
2. Promotions and Discounts
 a. Background
    628. In the NPRM, we asked whether an incumbent LEC's obligation to 
make their services available for resale at wholesale rates applies to 
discounted and promotional offerings and, if so, how. We also asked, if 
the wholesale pricing obligation applies to promotions and discounts, 
whether the reseller entrant's customer must take service pursuant to 
the same restrictions that apply to the incumbent LEC's retail 
customers.
 b. Discussion
    629. Section 251(c)(4) provides that incumbent LECs must offer for 
resale at wholesale rates ``any telecommunications service'' that the 
carrier provides at retail to noncarrier subscribers. This language 
makes no exception for promotional or discounted offerings, including 
contract and other customer-specific offerings. We therefore conclude 
that no basis exists for creating a general exemption from the 
wholesale requirement for all promotional or discount service offerings 
made by incumbent LECs. A contrary result would permit incumbent LECs 
to avoid the statutory resale obligation by shifting their customers to 
nonstandard offerings, thereby eviscerating the resale provisions of 
the 1996 Act. In discussing promotions here, we are only referring to 
price discounts from standard offerings that will remain available for 
resale at wholesale rates, i.e., temporary price discounts. Limited 
time offerings of service are still subject to resale pursuant to 
Section VIII.A.
    630. There remains, however, the question of whether all short-term 
promotional prices are ``retail rates'' for purposes of calculating 
wholesale rates pursuant to section 252(d)(3). The 1996 Act does not 
define ``retail rate;'' nor is there any indication that Congress 
considered the issue. In view of this ambiguity, we conclude that 
``retail rate'' should be interpreted in light of the pro-competitive 
policies underlying the 1996 Act. We recognize that promotions that are 
limited in length may serve procompetitive ends through enhancing 
marketing and sales-based competition and we do not wish to 
unnecessarily restrict such offerings. We believe that, if promotions 
are of limited duration, their procompetitive effects will outweigh any 
potential anticompetitive effects. We therefore conclude that short-
term promotional

[[Page 45569]]

prices do not constitute retail rates for the underlying services and 
are thus not subject to the wholesale rate obligation.
    631. We must also determine when a promotional price ceases to be 
``short term'' and must therefore be treated as a retail rate for an 
underlying service. Incumbent LEC commenters support 120 days as the 
maximum period for such promotions. This has been criticized as being 
too long. We are concerned that excluding promotions that are offered 
for as long as four months may unreasonably hamper the efforts of new 
competitors that seek to enter local markets through resale. We believe 
that promotions of up to 90 days, when subjected to the conditions 
outlined below, will have significantly lower anticompetitive 
potential, especially as compared to the potential procompetitive 
marketing uses of such promotions. We therefore establish a presumption 
that promotional prices offered for a period of 90 days or less need 
not be offered at a discount to resellers. Promotional offerings 
greater than 90 days in duration must be offered for resale at 
wholesale rates pursuant to section 251(c)(4)(A). To preclude the 
potential for abuse of promotional discounts, any benefit of the 
promotion must be realized within the time period of the promotion, 
e.g., no benefit can be realized more than ninety days after the 
promotional offering is taken by the customer if the promotional 
offering was for ninety days. In addition, an incumbent LEC may not use 
promotional offerings to evade the wholesale obligation, for example by 
consecutively offering a series of 90-day promotions.
    632. We find unconvincing the arguments that the offerings under 
section 251(c)(4) should not apply to volume-based discounts. The 1996 
Act on its face does not exclude such offerings from the wholesale 
obligation. If a service is sold to end users, it is a retail service, 
even if it is priced as a volume-based discount off the price of 
another retail service. The avoidable costs for a service with volume-
based discounts, however, may be different than without volume 
contracts.
    633. We are concerned that conditions that attach to promotions and 
discounts could be used to avoid the resale obligation to the detriment 
of competition. Allowing certain incumbent LEC end user restrictions to 
be made automatically binding on reseller end users could further 
exacerbate the potential anticompetitive effects. We recognize, 
however, that there may be reasonable restrictions on promotions and 
discounts. We conclude that the substance and specificity of rules 
concerning which discount and promotion restrictions may be applied to 
resellers in marketing their services to end users is a decision best 
left to state commissions, which are more familiar with the particular 
business practices of their incumbent LECs and local market conditions. 
These rules are to be developed, as necessary, for use in the 
arbitration process under section 252.
    634. With respect to volume discount offerings, however, we 
conclude that it is presumptively unreasonable for incumbent LECs to 
require individual reseller end users to comply with incumbent LEC 
high-volume discount minimum usage requirements, so long as the 
reseller, in aggregate, under the relevant tariff, meets the minimal 
level of demand. The Commission traditionally has not permitted such 
restrictions on the resale of volume discount offers. Regulatory 
Policies Concerning Resale and Shared Use of Common Carrier Services 
and Facilities, 41 FR 30657 (July 26, 1976). We believe restrictions on 
resale of volume discounts will frequently produce anticompetitive 
results without sufficient justification. We, therefore, conclude that 
such restrictions should be considered presumptively unreasonable. We 
note, however, that in calculating the proper wholesale rate, incumbent 
LECs may prove that their avoided costs differ when selling in large 
volumes.
3. Below-Cost and Residential Service
a. Background
    635. Responding to our general questions regarding the scope of 
limitations that may be placed on competitors' resale of incumbent LEC 
services, parties addressed in their comments whether below-cost and 
residential services are subject to section 251(c)(4).
b. Discussion
    636. Subject to the cross-class restrictions discussed below, we 
believe that below-cost services are subject to the wholesale rate 
obligation under section 251(c)(4). First, the 1996 Act applies to 
``any telecommunications service'' and thus, by its terms, does not 
exclude these types of services. Given the goal of the 1996 Act to 
encourage competition, we decline to limit the resale obligation with 
respect to certain services where the 1996 Act does not specifically do 
so. Second, simply because a service may be priced at below-cost levels 
does not justify denying customers of such a service the benefits of 
resale competition. We note that, unlike the pricing standard for 
unbundled elements, the resale pricing standard is not based on cost 
plus a reasonable profit. The resale pricing standard gives the end 
user the benefit of an implicit subsidy in the case of below-cost 
service, whether the end user is served by the incumbent or by a 
reseller, just as it continues to take the contribution if the service 
is priced above cost. So long as resale of the service is generally 
restricted to those customers eligible to receive such service from the 
incumbent LEC, as discussed below, demand is unlikely to be 
significantly increased by resale competition. Thus, differences in 
incumbent LEC revenue resulting from the resale of below-cost services 
should be accompanied by proportionate decreases in expenditures that 
are avoided because the service is being offered at wholesale.
    637. We have considered the economic impact of our rules in this 
section on small incumbent LECs. For example, MECA argues that services 
incumbent LECs offer at below-cost rates should not be subject to 
resale under section 251(c)(4). We do not adopt MECA's proposal. As 
explained above, we conclude that the 1996 Act provides that below-cost 
services are subject to the section 251(c)(4) resale obligation and 
that differences in incumbent LEC revenue resulting from the resale of 
below-cost services should be accompanied by decreases in expenditures 
that are avoided because the service is being offered at wholesale. 
Therefore, resale of below-cost services at wholesale rates should not 
adversely impact small incumbent LECs. We also note that certain small 
incumbent LECs are not subject to our rules under section 251(f)(1) of 
the 1996 Act, unless otherwise determined by a state commission, and 
certain other small incumbent LECs may seek relief from their state 
commissions from our rules under section 251(f)(2) of the 1996 Act.
4. Cross-Class Selling
a. Background
    638. In the NPRM, we sought comment on the meaning of section 
251(c)(4)(B) which provides that ``[a] State commission may, consistent 
with regulations prescribed by the Commission under this section, 
prohibit a reseller that obtains at wholesale rates a 
telecommunications service that is available at retail only to a 
category of subscribers from offering such service to a different 
category of subscribers.'' We suggested that competing 
telecommunications carriers should not be allowed to purchase a 
subsidized service that is offered to a specific

[[Page 45570]]

category of subscribers and then resell such service to other 
customers. We tentatively concluded, for example, that it might be 
reasonable for a state to restrict the resale of a residential exchange 
service that is limited to low-income consumers, such as the existing 
Lifeline program. We noted that we have generally not allowed carriers 
to prevent other carriers from purchasing high-volume, low-price 
offerings to resell to a broad pool of lower volume customers. 
Similarly, we inquired into the propriety of practices such as limiting 
the resale of flat-rated service.
b. Discussion
    639. There is general agreement that residential services should 
not be resold to nonresidential end users, and we conclude that 
restrictions prohibiting such cross-class reselling of residential 
services are reasonable. We conclude that section 251(c)(4)(B) permits 
states to prohibit resellers from selling residential services to 
customers ineligible to subscribe to such services from the incumbent 
LEC. For example, this would prevent resellers from reselling 
wholesale-priced residential service to business customers. We also 
conclude that section 251(c)(4)(B) allows states to make similar 
prohibitions on the resale of Lifeline or any other means-tested 
service offering to end users not eligible to subscribe to such service 
offerings. State commissions have established rate structures that take 
into account certain desired balances between residential and business 
rates and the goal of maximizing access by low-income consumers to 
telecommunications services. We do not wish to disturb these efforts by 
prohibiting or overly narrowing state commissions' ability to impose 
such restrictions on resale.
    640. Shared tenant services are made possible through the resale 
and trunking of flat-rated services to multiple customers. We do not 
believe that these or other efficient uses of technology should be 
discouraged through restrictions on the resale of flat-rated offerings 
to multiple end users, even if incumbent LECs have not always priced 
such offerings assuming these usage patterns. We therefore conclude 
that such restrictions are presumptively unreasonable.
    641. We also conclude that all other cross-class selling 
restrictions should be presumed unreasonable. Without clear statutory 
direction concerning potentially allowable cross-class restrictions, we 
are not inclined to allow the imposition of restrictions that could 
fetter the emergence of competition. As with volume discount and flat-
rated offerings, we will allow incumbent LECs to rebut this presumption 
by proving to the state commission that the class restriction is 
reasonable and nondiscriminatory.
5. Incumbent LEC Withdrawal of Services
a. Background
    642. In the NPRM, we sought comment on whether an incumbent LEC can 
avoid making a service available at wholesale rates by ceasing to offer 
the retail service on a retail basis, or whether the incumbent should 
first be required to make a showing that withdrawing the offering is in 
the public interest or that competitors will continue to have an 
alternative way of providing service. We also asked if access to 
unbundled elements addresses the concern that incumbent LECs could 
withdraw retail services.
b. Discussion
    643. We are concerned that the incumbent LECs' ability to withdraw 
services may have anticompetitive effects where resellers are 
purchasing such services for resale in competition with the incumbent. 
We decline to issue general rules on this subject because we conclude 
that this is a matter best left to state commissions. Many state 
commissions have rules regarding the withdrawal of retail services and 
have experience regulating such matters. States can assess, for 
example, the universal service implications of an incumbent LEC's 
proposal to withdraw a retail service. Therefore, we conclude that our 
general presumption that incumbent LEC restrictions on resale are 
unreasonable does not apply to incumbent LEC withdrawal of service. 
States must ensure that procedural mechanisms exist for processing 
complaints regarding incumbent LEC withdrawals of services. We find it 
important, however, to ensure that grandfathered customers--subscribers 
to the service being withdrawn who are allowed by an incumbent LEC to 
continue purchasing services--not be denied the benefits of 
competition. We conclude that, when an incumbent LEC grandfathers its 
own customers of a withdrawn service, such grandfathering should also 
extend to reseller end users. For the duration of any grandfathering 
period, all grandfathered customers should have the right to purchase 
such grandfathered services either directly from the incumbent LEC or 
indirectly through a reseller. The incumbent LEC shall offer wholesale 
rates for such grandfathered services to resellers for the purpose of 
serving grandfathered customers.
6. Provisioning
    644. We conclude that service made available for resale be at least 
equal in quality to that provided by the incumbent LEC to itself or to 
any subsidiary, affiliate, or any other party to which the carrier 
directly provides the service, such as end users. Practices to the 
contrary violate the 1996 Act's prohibition of discriminatory 
restrictions, limitations, or prohibitions on resale. This requirement 
includes differences imperceptible to end users because such 
differences may still provide incumbent LECs with advantages in the 
marketplace. Additionally, we conclude that incumbent LEC services are 
to be provisioned for resale with the same timeliness as they are 
provisioned to that incumbent LEC's subsidiaries, affiliates, or other 
parties to whom the carrier directly provides the service, such as end 
users. This equivalent timeliness requirement also applies to incumbent 
LEC claims of capacity limitations and incumbent LEC requirements 
relating to such limitations, such as potential down payments. We note 
that common carrier obligations, established by federal and state law 
and our rules, continue to apply to incumbent LECs in their relations 
with resellers. With regard to customer changeover charges, we conclude 
that states should determine reasonable and nondiscriminatory rates for 
such charges.
    645. Brand identification is likely to play a major role in markets 
where resellers compete with incumbent LECs for the provision of local 
and toll service. This brand identification is critical to reseller 
attempts to compete with incumbent LECs and will minimize consumer 
confusion. Incumbent LECs are advantaged when reseller end users are 
advised that the service is being provided by the reseller's primary 
competitor. We therefore conclude that where operator, call completion, 
or directory assistance service is part of the service or service 
package an incumbent LEC offers for resale, failure by an incumbent LEC 
to comply with reseller branding requests presumptively constitutes an 
unreasonable restriction on resale. This presumption may be rebutted by 
an incumbent LEC proving to the state commission that it lacks the 
capability to comply with unbranding or rebranding requests. We 
recognize that an incumbent LEC may incur costs in complying with a 
request for unbranding or rebranding. Because we

[[Page 45571]]

do not have a record on which to determine the level of fees or 
wholesale pricing offsets that may reasonably be assessed to recover 
these costs, we leave such determinations to the state commissions.

D. Resale Obligations of LECs Under Section 251(b)(1)

    646. Section 251(b)(1) imposes a duty on all LECs to offer certain 
services for resale. Specifically, section 251(b)(1) requires LECs 
``not to prohibit, and not to impose unreasonable or discriminatory 
conditions or limitations on, the resale of its telecommunications 
services.''
1. Background
    647. In the NPRM, we sought comment generally on the relationship 
of section 251(b)(1) to section 251(c)(4). We sought comment on whether 
all LECs are prohibited from imposing unreasonable restrictions on 
resale of their services, but only incumbent LECs that provide retail 
services to subscribers that are not telecommunications carriers are 
required to make such services available at wholesale rates to 
requesting telecommunications carriers. We also sought comment on what 
types of resale restrictions should be permitted under section 
251(b)(1) and stated our belief that few, if any, conditions or 
limitations should be permitted for the same reasons that resale 
restrictions are sharply limited under section 251(c)(4). We also asked 
what standards should be adopted for determining whether resale 
restrictions should be permitted, and whether presumptions should be 
established.
2. Discussion
    648. There are two differences between the resale obligations in 
section 251(b)(1) and in section 251(c)(4): the scope of services that 
must be resold and the pricing of such resale offerings. Section 
251(b)(1) requires resale of all telecommunications services offered by 
the carrier while section 251(c)(4) only applies to telecommunications 
services that the carrier provides at retail to subscribers who are not 
telecommunications carriers. Thus, the scope of services to which 
section 251(b)(1) applies is larger and necessarily includes all 
services subject to resale under section 251(c)(4). We need not 
prescribe a minimum list of services that are subject to the 251(b)(1) 
resale requirement for the same reasons that we specified for not 
prescribing such a list in Section VIII.A. of this Order. We note that 
section 251(b)(1) clearly omits a wholesale pricing requirement. We 
therefore conclude that the 1996 Act does not impose wholesale pricing 
requirements on nonincumbent LECs. Nonincumbent LECs definitionally 
lack the market power possessed by incumbent LECs and were therefore 
not made subject to the wholesale pricing obligation in the 1996 Act. 
Their wholesale rates will face competition by incumbent LECs, making a 
wholesale pricing requirement for nonincumbent LECs unnecessary.
    649. Sections 251(b)(1) and 251(c)(4) contain the same statutory 
standards regarding resale restrictions. Therefore, we conclude that 
our rules concerning resale restrictions under section 251(b)(1), such 
as the general presumption that all resale restrictions are 
unreasonable, should be the same as under section 251(c)(4). We 
conclude that any restriction of a type that has been found reasonable 
for incumbent LECs should be deemed reasonable for all other LECs as 
well.

E. Application of Access Charges

1. Background
    650. In the NPRM, we suggested that an entrant that merely resold a 
bundled retail service purchased at wholesale rates would not receive 
access revenues. In other words, IXCs must still pay access charges to 
incumbent LECs for originating and terminating interstate traffic of an 
end user served by a telecommunications carrier that resells incumbent 
LEC services under section 251(c)(4).
2. Discussion
    651. We conclude that the 1996 Act requires that incumbent LECs 
continue to receive access charge revenues when local services are 
resold under section 251(c)(4). IXCs must still pay access charges to 
incumbent LECs for originating or terminating interstate traffic, even 
when their end user is served by a telecommunications carrier that 
resells incumbent LEC retail services. Resale, as defined in section 
251(b)(1) and 251(c)(4), involves services, in contrast to section 
251(c)(3), which governs sale of network elements. New entrants that 
purchase retail local exchange services from an incumbent LEC at 
wholesale rates are entitled to resell only those retail services, and 
not any other services--such as exchange access--the LEC may offer 
using the same facilities. IXCs must therefore still purchase access 
services from incumbent LECs outside of the resale framework of 
251(c)(4), through existing interstate access tariffs.
    652. Most existing interstate access charges are recovered from 
IXCs, and therefore can easily be recovered by incumbent LECs whether 
or not the incumbent LEC retains its billing relationship with the end 
user subscriber. To allow incumbent LECs to continue recovering the 
subscriber line charge (SLC), however, the mechanism for assessment of 
the SLC must be modified. The SLC is currently assessed directly on end 
users as a monthly charge. When an end user customer receives local 
exchange service from a reseller, however, the incumbent LEC will have 
no direct commercial relationship with that end user. Because the end 
user would not be a customer of the incumbent LEC, the incumbent LEC 
could not bill SLC directly to the end user as specified under our 
existing rules.
    653. In March 1995, in the Rochester Waiver Order, we granted 
Rochester Telephone waivers to permit Rochester Telephone to recover 
the SLC from carriers that purchase local exchange service for resale, 
rather than recovering the SLC directly from end users. In that order, 
we stated that by offering the local exchange service for resale and by 
unbundling subscriber lines from other network functions, Rochester 
Telephone created a situation where it would no longer have a direct 
relationship with end users, IXCs, or both, and that such a situation 
was not contemplated when the Commission created the rules governing 
the recovery of access charges. We also permitted Rochester Telephone 
to bill to resellers the PIC change charge, which is assessed by 
incumbent local exchange carriers on end users that wish to change 
their primary interexchange carrier (PIC).
    654. The resale requirements of the 1996 Act create a situation for 
the entire industry that is analogous to the situation Rochester 
Telephone faced in 1995. We therefore conclude that similar relief is 
warranted here with respect to the SLC, so that incumbent LECs can 
recover the SLC from resellers, as we conclude the 1996 Act mandates. 
Although the PIC change charge is not a part of access charges, and is 
assessed only when an end user changes his or her primary interexchange 
carrier, this charge has similar characteristics to the SLC and 
therefore should also be subject to the rule we adopt. Incumbent LECs 
may assess the SLC and the PIC change charge on telecommunications 
carriers that resell incumbent LEC services under section 251(c)(4).
    655. Although incumbent LECs may continue to recover the SLC when 
other carriers resell their local exchange services, the SLC is not 
subject to the wholesale pricing standard of section 252(d)(3). As 
described above, resellers

[[Page 45572]]

of local exchange service are not reselling access services; they are 
purchasing these services from incumbent LECs in the same manner they 
do today. The SLC is a component of interstate access charges, not of 
intrastate local service rates. Consistent with the principles of cost-
causation and economic efficiency, we have required the portion of 
interstate allocated loop costs represented by the SLC to be recovered 
from end users, rather than from carriers as with other access charges. 
Although the SLC is listed on end user monthly local service bills, 
this charge does not represent a ``telecommunications service [an 
incumbent LEC] provides at retail to subscribers.'' Rather, the SLC, 
like other interstate access charges, relates solely to incumbent LEC 
interstate access services, which are provided to other carriers rather 
than retail subscribers and which we have concluded are not subject to 
the resale requirements of section 251(c)(4). Therefore, the reseller 
shall pay the SLC to the incumbent LEC for each subscriber taking 
resold service. The specific SLC that applies depends upon the identity 
of the end user served by the reselling telecommunications carrier.

IX. Duties Imposed on ``Telecommunications Carriers'' by Section 251(a)

A. Background

    656. Section 251(a) imposes two fundamental duties on all 
telecommunications carriers: (1) ``to interconnect directly or 
indirectly with the facilities and equipment of other 
telecommunications carriers;'' and (2) ``not to install network 
features, functions, or capabilities that do not comply with the 
guidelines and standards established pursuant to sections 255 or 256.'' 
47 U.S.C. 251(a). Section 255 addresses access by persons with 
disabilities and ensures that manufacturers and providers of 
telecommunications will design equipment and provide service that is 
accessible to, and usable by, individuals with disabilities. Section 
256 provides for coordination for interconnectivity ``to promote 
nondiscriminatory accessibility by the broadest number of users and 
vendors of communications products and services.'' 47 U.S.C. Secs. 255, 
256. In this proceeding we determine which carriers are 
``telecommunications carriers'' as defined in section 3(44) of the Act. 
The term telecommunications carrier means ``any provider of 
telecommunications services, except that such term does not include 
aggregators of telecommunications services (as defined in section 226). 
A telecommunications carrier shall be treated as a common carrier under 
this Act only to the extent that it is engaged in providing 
telecommunications services, except that the Commission shall determine 
whether the provision of fixed and mobile satellite service shall be 
treated as common carriage.'' 47 U.S.C. 153(44). In the NPRM, we 
tentatively concluded that, pursuant to the statute's definition of 
``telecommunications carrier'' and ``telecommunications service,'' to 
the extent a carrier is engaged in providing for a fee local, 
interexchange, or international services, directly to the public or to 
such classes of users as to be effectively available directly to the 
public, that carrier falls within the definition of 
``telecommunications carrier.'' We sought comment on which carriers are 
included under this definition, and on whether a provider may qualify 
as a telecommunications carrier for some purposes but not others.
    657. We also tentatively concluded that we should determine whether 
the provision of mobile satellite services is Commercial Mobile Radio 
Services (CMRS) or Private Mobile Radio Service (PMRS) based on the 
factors set forth in the CMRS Second Report and Order. NPRM at para 
247. The Commission makes this determination by looking at an array of 
public interest considerations (e.g., the types of services being 
offered and the number of licensees being authorized). See, e.g., 
Amendment of Parts 2, 22 and 25 of the Commission's Rules to Allocate 
Spectrum for, and To Establish Other Rules and Policies Pertaining to 
the Use of Radio Frequencies in a Land Mobile Satellite Service for the 
Provision of Various Common Carrier Services, GEN Docket No. 84-1234, 
Second Report and Order, 52 FR 4017 (February 9, 1987); Amendment to 
the Commission's Rules to Allocate Spectrum for, and to Establish Other 
Rules and Policies Pertaining to a Radiodetermination Satellite 
Service, GEN Docket No. 84-689, Second Report and Order, 51 FR 18444 
(May 20, 1986). We sought comment on the meaning of offering service 
``directly or indirectly'' to the public in the context of section 
251(a)(1) and on whether section 251(a) allows non-incumbent LECs 
discretion to interconnect directly or indirectly with a requesting 
carrier. We also sought comment on what other actions we should take to 
ensure that carriers do not install network features, functions, or 
capabilities that are inconsistent with guidelines and standards 
established pursuant to sections 255 and 256.

B. Discussion

    658. A ``telecommunications carrier'' is defined as ``any provider 
of telecommunications services, except that such term does not include 
aggregators of telecommunications services (as defined in section 
226).'' 47 U.S.C. 153(44). The term ``aggregator'' is defined as ``any 
person that, in the ordinary course of its operations, makes telephones 
available to the public or to transient users of its premises, for 
interstate telephone calls using a provider of operator services.'' 47 
U.S.C. 226(a)(2). A telecommunications carrier shall be treated as a 
common carrier under the Act ``only to the extent that it is engaged in 
providing telecommunications services, except that the Commission shall 
determine whether the provision of fixed and mobile satellite service 
shall be treated as common carriage.'' A ``telecommunications service'' 
is defined as the ``offering of telecommunications for a fee directly 
to the public, or to such classes of users as to be effectively 
available directly to the public, regardless of the facilities used.'' 
We conclude that to the extent a carrier is engaged in providing for a 
fee domestic or international telecommunications, directly to the 
public or to such classes of users as to be effectively available 
directly to the public, the carrier falls within the definition of 
``telecommunications carrier.'' We find that this definition is 
consistent with the 1996 Act, and there is nothing in the record in 
this proceeding that suggests that this definition should not be 
adopted. Also, enhanced service providers, to the extent that they are 
providing telecommunications services, are entitled to the rights under 
section 251(a).
    659. We believe, as a general policy matter, that all 
telecommunications carriers that compete with each other should be 
treated alike regardless of the technology used unless there is a 
compelling reason to do otherwise. We agree with those parties that 
argue that all CMRS providers are telecommunications carriers and are 
thus obligated to comply with section 251(a). The term ``CMRS'' is 
defined as ``any mobile service * * * that is provided for profit and 
makes interconnected service available (A) to the public or (B) to such 
classes of eligible users as to be effectively available to a 
substantial portion of the public.'' 47 U.S.C. Sec. 332(d)(1). CMRS 
includes, among others, some private paging, personal communications 
services, business radio services, and

[[Page 45573]]

mobile service that is the functional equivalent of a commercial mobile 
radio service. 47 CFR Sec. 20.9. These carriers meet the definition of 
``telecommunications carrier'' because they are providers of 
telecommunications services as defined in the 1996 Act and are thus 
entitled to the benefits of section 251(c), which include the right to 
request interconnection and obtain access to unbundled elements at any 
technically feasible point in an incumbent LEC's network. PMRS is 
defined as any mobile service that is not a commercial service or the 
functional equivalent of a commercial mobile service. We conclude that 
to the extent a PMRS provider uses capacity to provide domestic or 
international telecommunications for a fee directly to the public, it 
will fall within the definition of ``telecommunications carrier'' under 
the Act and will be subject to the duties listed in section 251(a). The 
Commission held in the CMRS Second Report and Order that any PMRS 
provider that ``employs spectrum for not-for-profit services, such as 
an internal operation, but also uses its excess capacity to make 
available a service that is intended to receive compensation, will be 
deemed to be a `for profit' service to the extent of such excess 
capacity activities.'' Implementation of Section 3(n) and 332 of the 
Communications Act, Second Report and Order, GN Docket No. 93-252, 59 
FR 18493 (April 19, 1994) (CMRS Second Report and Order).
    660. We conclude that cost-sharing for the construction and 
operation of private telecommunications networks is not within the 
definition of ``telecommunications services'' and thus such operators 
of private networks are not subject to the requirements of section 
251(a). We believe that such methods of cost-sharing do not equate to a 
``fee directly to the public'' under the definition of 
``telecommunications service.'' Conversely, to the extent an operator 
of a private telecommunications network is offering 
``telecommunications'' (the term ``telecommunications'' means ``the 
transmission, between or among points specified by the user, of 
information of the user's choosing, without change in form or content 
of the information as sent and received'' 47 U.S.C. Sec. 153(43)) for a 
fee directly to the public, or to such classes of users as to be 
effectively available directly to the public (i.e., providing a 
telecommunications service), the operator is a telecommunications 
carrier and is subject to the duties in section 251(a). Providing to 
the public telecommunications (e.g., selling excess capacity on private 
fiber or wireless networks), constitutes provision of a 
telecommunications service and thus subjects the operator of such a 
network to the duties of section 251(a) to that extent.
    661. We conclude that, if a company provides both 
telecommunications and information services, it must be classified as a 
telecommunications carrier for purposes of section 251, and is subject 
to the obligations under section 251(a), to the extent that it is 
acting as a telecommunications carrier. We also conclude that 
telecommunications carriers that have interconnected or gained access 
under sections 251(a)(1), 251(c)(2), or 251(c)(3), may offer 
information services through the same arrangement, so long as they are 
offering telecommunications services through the same arrangement as 
well. Under a contrary conclusion, a competitor would be precluded from 
offering information services in competition with the incumbent LEC 
under the same arrangement, thus increasing the transaction cost for 
the competitor. We find this to be contrary to the pro-competitive 
spirit of the 1996 Act. By rejecting this outcome we provide 
competitors the opportunity to compete effectively with the incumbent 
by offering a full range of services to end users without having to 
provide some services inefficiently through distinct facilities or 
agreements. In addition, we conclude that enhanced service providers 
that do not also provide domestic or international telecommunications, 
and are thus not telecommunications carriers within the meaning of the 
Act, may not interconnect under section 251.
    662. Consistent with our tentative conclusion in the NPRM, we will 
determine whether the provision of mobile satellite service (MSS) is 
CMRS (and therefore common carriage) or PMRS based on the factors set 
forth in theCMRS Second Report and Order. Commenters have not raised 
objections to the Commission's tentative conclusion on this issue.
    663. Regarding the issue of interconnecting ``directly or 
indirectly'' with the facilities of other telecommunications carriers, 
we conclude that telecommunications carriers should be permitted to 
provide interconnection pursuant to section 251(a) either directly or 
indirectly, based upon their most efficient technical and economic 
choices. The interconnection obligations under section 251(a) differ 
from the obligations under section 251(c). Unlike section 251(c), which 
applies to incumbent LECs, section 251(a) interconnection applies to 
all telecommunications carriers including those with no market power. 
Given the lack of market power by telecommunication carriers required 
to provide interconnection via section 251(a), and the clear language 
of the statute, we find that indirect connection (e.g., two non-
incumbent LECs interconnecting with an incumbent LEC's network) 
satisfies a telecommunications carrier's duty to interconnect pursuant 
to section 251(a). We decline to adopt, at this time, Metricom's 
suggestion to forbear under section 10 of the 1996 Act from imposing 
any interconnection requirements upon non-dominant carriers. We believe 
that, even for telecommunications carriers with no market power, the 
duty to interconnect directly or indirectly is central to the 1996 Act 
and achieves important policy objectives. Nothing in the record 
convinces us that we should forbear from imposing the provisions of 
section 251(a) on non-dominant carriers. In fact, section 251 
distinguishes between dominant and non-dominant carriers, and imposes a 
number of additional obligations exclusively on incumbent LECs. 
Similarly, we also do not agree with the Texas Commission's argument 
that the obligations of section 251(a) should apply equally to all 
telecommunications carriers. Section 251 is clear in imposing different 
obligations on carriers depending upon their classification (i.e., 
incumbent LEC, LEC, or telecommunications carrier). For example, 
section 251(c) specifically imposes obligations upon incumbent LECs to 
interconnect, upon request, at all technically feasible points. This 
direct interconnection, however, is not required under section 251(a) 
of all telecommunications carriers.
    664. Section 251(a)(2) prohibits telecommunications carriers from 
installing network features, functions, and capabilities that do not 
comply with standards or guidelines established under sections 255 and 
256. Because the Commission and the Architectural and Transportation 
Barriers Compliance Board have not developed standards or guidelines 
under section 255, we find that it would be premature at this point to 
attempt to delineate specific requirements or definitions of terms to 
implement Section 251(a)(2). The Illinois Commission lists several 
features which could provide access to individuals with disabilities, 
such as access to interrupt messages, directory assistance and operator 
services by users of text telephones (TTYs). Illinois

[[Page 45574]]

Commission comments at 82-83. Specific accessibility requirements such 
as those proposed by the Illinois Commission will need to be developed 
in proceedings to implement section 255, and therefore, we will not set 
forth any required ``features, functions, or capabilities'' in this 
proceeding. Similarly, the Commission has asked its federal advisory 
committee, the Network Reliability and Interoperability Council, for 
recommendations on how the Commission should implement Section 256. We 
intend to issue a further notice of proposed rulemaking seeking comment 
on what accessibility and compatibility requirements apply to 
telecommunications carriers who install network features, functions and 
capabilities.

X. Commercial Mobile Radio Service Interconnection

    665. In the NPRM, we sought comment on whether interconnection 
arrangements between incumbent LECs and CMRS providers fall within the 
scope of sections 251 and 252. Application of sections 251 and 252 to 
LEC-CMRS interconnection arrangements involves two distinct issues. One 
is whether the terms and conditions of the physical interconnection 
between incumbent LECs and CMRS providers are governed under section 
251(c)(2), and the corresponding pricing standards set forth in section 
252(d)(1). The second, and perhaps more critical issue from the CMRS 
providers' perspective, is whether CMRS providers are entitled to 
reciprocal compensation for transport and termination under section 
251(b)(5), and the corresponding pricing standards set forth in section 
252(d)(2).
    666. We tentatively concluded in the NPRM that CMRS providers are 
not obliged to provide to requesting telecommunications carriers either 
reciprocal compensation for transport and termination of 
telecommunications under section 251(b)(5), or interconnection under 
the provisions of section 251(c)(2), but that CMRS providers may be 
entitled to request interconnection under section 251(c)(2) for the 
purposes of providing ``telephone exchange service and exchange 
access.'' We sought comment on this tentative conclusion. We also asked 
for comment on the separate but related question of whether LEC-CMRS 
transport and termination arrangements fall within the scope of section 
251(b)(5). In addition, we sought comment on the relationship between 
section 251 and section 332(c). 47 U.S.C. 332(c). This section sets 
forth the regulatory treatment for mobile services, including the 
common carrier treatment of CMRS providers (except for such provisions 
of Title II as the Commission may specify), the right of CMRS providers 
to request (and the Commission to order) physical interconnection with 
other common carriers and the preemption of state regulation of the 
entry of or the rates charged by any CMRS providers. We acknowledged 
that issues relating to LEC-CMRS interconnection pursuant to section 
332(c) were part of an ongoing proceeding initiated before the passage 
of the 1996 Act, (Interconnection Between Local Exchange Carriers and 
Commercial Mobile Radio Service Providers, Notice of Proposed 
Rulemaking, CC Docket No. 95-185, 61 FR 3644 (February 1, 1996) (LEC-
CMRS Interconnection NPRM)), and retained the prerogative of 
incorporating by reference the comments filed in that docket to the 
extent necessary. We hereby do so.

A. CMRS Providers and Obligations of Local Exchange Carriers Under 
Section 251(b) and Incumbent Local Exchange Carriers Under Section 
251(c)

1. Background
    667. Section 251(b) imposes duties only on LECs, and section 251(c) 
imposes duties only on incumbent LECs. Section 3(26) of the Act defines 
``local exchange carrier'' to mean ``any person that is engaged in the 
provision of telephone exchange service or exchange access,'' but 
``does not include a person insofar as such person is engaged in the 
provision of a commercial mobile service under section 332(c), except 
to the extent that the Commission finds that such service should be 
included in the definition of such term.'' In the NPRM, we sought 
comment on whether, and to what extent, CMRS providers should be 
classified as ``local exchange carriers'' and therefore subject to the 
duties and obligations imposed by section 251(b).
2. Discussion
    668. We are not persuaded by those arguing that CMRS providers 
should be treated as LECs, and decline at this time to treat CMRS 
providers as LECs. Section 3(26) of the Act, quoted above, makes clear 
that CMRS providers should not be classified as LECs until the 
Commission makes a finding that such treatment is warranted. We 
disagree with COMAV and National Wireless Resellers Association that 
CMRS providers are de facto LECs (and even incumbent LECs if they are 
affiliated with a LEC) simply because they provide telephone exchange 
and exchange access services. Congress recognized that some CMRS 
providers offer telephone exchange and exchange access services, and 
concluded that their provision of such services, by itself, did not 
require CMRS providers to be classified as LECs. We further note that, 
because the determination as to whether CMRS providers should be 
defined as LECs is within the Commission's sole discretion, states are 
preempted from requiring CMRS providers to classify themselves as 
``local exchange carriers'' or be subject to rate and entry regulation 
as a precondition to participation in interconnection negotiations and 
arbitrations under sections 251 and 252.
    669. NARUC argues that CMRS providers should be classified as LECs 
if they provide fixed service. We are currently seeking comment in our 
CMRS Flexibility Proceeding, (Amendment of the Commission's Rules to 
Permit Flexible Service Offerings in the Commercial Mobile Radio 
Services, WT Docket No. 96-6, First Report and Order and Further Notice 
of Proposed Rulemaking, FCC 96-283 (released August 1, 1996)), on the 
regulatory treatment to be afforded CMRS providers when they provide 
fixed services. Thus, we believe that it would be premature to answer 
that question here, based only on the record in this proceeding. We 
also decline to adopt the Illinois Commission's suggestion that we find 
that a CMRS provider is a LEC if the CMRS provider seeks to compete 
directly with a wireline LEC. Even if we were to accept the Illinois 
Commission's underlying assumption, the record in this proceeding 
contains no evidence that wireless local loops have begun to replace 
wireline loops for the provision of local exchange service. Thus, until 
such time that we decide otherwise, CMRS providers will not be 
classified as LECs, and are not subject to the obligations of section 
251(b). We further note that, even if we were to classify some CMRS 
providers as LECs, other types of CMRS providers, such as paging 
providers, might not be so classified because they do not offer local 
exchange service or exchange access.
    670. We further note that, because CMRS providers do not fall 
within the definition of a LEC under section 251(h)(1), they are not 
subject to the duties and obligations imposed on incumbent LECs under 
section 251(c). An incumbent LEC is defined in section 251(h)(1), and 
includes only those LECs that were, on the date of enactment of the 
1996 Act, deemed to be members of NECA pursuant to 47 CFR 
Sec. 69.601(b), or the successor or assign of a NECA member. Similarly, 
we do not find that

[[Page 45575]]

CMRS providers satisfy the criteria set forth in section 251(h)(2), 
which grants the Commission the discretion to, by rule, provide for the 
treatment of a LEC as an incumbent LEC if certain conditions are met.

B. Reciprocal Compensation Arrangements Under Section 251(b)(5)

    671. Some parties contend that LEC-CMRS transport and termination 
arrangements do not fall within the scope of 251(b)(5), which requires 
LECs to establish reciprocal compensation arrangements for transport 
and termination. Other commenters argue that because CMRS providers 
fall within the definition of ``telecommunications carriers,'' they 
fall within the scope of section 251(b)(5).
    672. Under section 251(b)(5), LECs have a duty to establish 
reciprocal compensation arrangements for the transport and termination 
of ``telecommunications.'' Under section 3(43), ``[t]he term 
`telecommunications' means the transmission, between or among points 
specified by the user, of information of the user's choosing, without 
change in the form or content of the information as sent and 
received.'' All CMRS providers offer telecommunications. Accordingly, 
LECs are obligated, pursuant to section 251(b)(5) (and the 
corresponding pricing standards of section 252(d)(2)), to enter into 
reciprocal compensation arrangements with all CMRS providers, including 
paging providers, for the transport and termination of traffic on each 
other's networks, pursuant to the rules governing reciprocal 
compensation set forth in Section XI.B, below.

C. Interconnection Under Section 251(c)(2)

1. Background
    673. Section 251(c)(2)(A) provides that an incumbent LEC must 
provide interconnection with its local exchange network to ``any 
requesting telecommunications carrier * * * for the transmission and 
routing of telephone exchange service and exchange access.'' In the 
NPRM, we tentatively concluded that CMRS providers may be entitled to 
request interconnection under section 251(c)(2) for the purposes of 
providing telephone exchange service and exchange access. We sought 
comment on this tentative conclusion.
2. Discussion
    674. As discussed in the preceding section, CMRS providers meet the 
statutory definition of ``telecommunications carriers.'' We also agree 
with several commenters that many CMRS providers (specifically 
cellular, broadband PCS and covered SMR) also provide telephone 
exchange service and exchange access as defined by the 1996 Act. 
Incumbent LECs must accordingly make interconnection available to these 
CMRS providers in conformity with the terms of sections 251(c) and 252, 
including offering rates, terms, and conditions that are just, 
reasonable and nondiscriminatory.
    675. The 1996 Act defines ``telephone exchange service'' as 
``service within a telephone exchange, or within a connected system of 
telephone exchanges within the same exchange area * * * and which is 
covered by the exchange service charge, or (B) comparable service 
provided through a system of switches, transmission equipment, or other 
facilities (or combination thereof) by which a subscriber can originate 
and terminate a telecommunications service.'' 47 U.S.C. 153(47) 
(emphasis added). This is a broader definition of ``telephone exchange 
service'' than had previously existed; Congress changed the definition 
in the 1996 Act to include services ``comparable'' to telephone 
exchange. At a minimum, we find that cellular, broadband PCS, and 
covered SMR providers fall within the second part of the definition 
because they provide ``comparable service'' to telephone exchange 
service. The services offered by cellular, broadband PCS, and covered 
SMR providers are comparable because, as a general matter, and as some 
commenters note, these CMRS carriers provide local, two-way switched 
voice service as a principal part of their business. Indeed, the 
Commission has described cellular service as exchange telephone 
service, (See Need to Promote Competition and Efficient Use of Spectrum 
for Radio Common Carriers, Memorandum Opinion and Order, 59 Rad. Reg. 
2d 1275, 1278 (1986)), and cellular carriers as ``generally engaged in 
the provision of local exchange telecommunications in conjunction with 
local telephone companies * * *.'' In the Matter of the Need to Promote 
Competition and Efficient Use of Spectrum For Radio Common Carrier 
Services, Memorandum Opinion and Order, 59 Rad. Reg. 2d 1275, 1278 
(1986) (Competition Opinion); see also id. at 1284 (cellular carriers 
are primarily engaged in the provision of local, intrastate exchange 
telephone service); Equal Access and Interconnection Obligations 
Pertaining to Commercial Radio Services, CC Docket No. 94-54, Notice of 
Proposed Rulemaking and Notice of Inquiry, 59 FR 35664 (July 13, 1994). 
In addition, although CMRS providers are not currently classified as 
LECs, the fact that most CMRS providers are capable, both technically 
and pursuant to the terms of their licenses, of providing fixed 
services, as LECs do, buttresses our conclusion that these CMRS 
providers offer services that are ``comparable'' to telephone exchange 
service and supports the notion that these services may become a true 
economic substitute for wireline local exchange service in the future. 
See Amendment of the Commission's Rules to Permit Flexible Service 
Offerings in the Commercial Mobile Radio Services, WT Docket No. 96-6, 
First Report and Order and Further Notice of Proposed Rulemaking, FCC 
96-283 (released August 1, 1996) (amending rules to allow providers of 
narrowband and broadband PCS, cellular, CMRS SMR, CMRS paging, CMRS 220 
MHz service, and for-profit interconnected business radio services to 
offer fixed wireless services on their assigned spectrum on a co-
primary basis with mobile services).
    676. We also believe that other definitions in the Act support the 
conclusion that cellular, broadband PCS, and covered SMR licensees 
provide telephone exchange service. The fact that the 1996 Act's 
definition of a LEC excludes CMRS until the Commission finds that such 
service should be included in the definition,'' suggests that Congress 
found that some CMRS providers were providing telephone exchange 
service or exchange access, but sought to afford the Commission the 
discretion to decide whether CMRS providers should be treated as LECs 
under the new Act. Similarly, section 253(f) permits the states to 
impose certain obligations on ``telecommunications carrier[s] that 
seek[ ] to provide telephone exchange service'' in rural areas. The 
provision further provides that ``[t]his subsection shall not apply * * 
* to a provider of commercial mobile services.'' It would have been 
unnecessary for the statute to include this exception if some CMRS were 
not telephone exchange service. Similarly, section 271(c)(1)(A), which 
sets forth conditions for determining the presence of a facilities-
based competitor for purposes of BOC applications to provide in-region, 
interLATA services, provides that Part 22 [cellular] services ``shall 
not be considered to be telephone exchange services,'' for purposes of 
that section. Again, if Congress did not believe that cellular 
providers were engaged in the provision of telephone exchange service, 
it would not have

[[Page 45576]]

been necessary to exclude cellular providers from this provision.
    677. The arguments that CMRS traffic flows may differ from wireline 
traffic, that CMRS providers' termination costs may differ from LECs, 
that CMRS service areas do not coincide with wireline local exchange 
areas, or that CMRS providers are not LECs, do not alter our conclusion 
that cellular, broadband PCS, and covered SMR licensees provide 
telephone exchange service. These considerations are not relevant to 
the statutory definition of telephone exchange service in section 
3(47). Incumbent LECs are required to provide interconnection to CMRS 
providers who request it for the transmission and routing of telephone 
exchange service or exchange access, under the plain language of 
section 251(c)(2).

D. Jurisdictional Authority for Regulation of LEC-CMRS Interconnection 
Rates

1. Background
    678. In the NPRM, we sought comment on the relationship between 
section 251 and section 332(c). As noted above, we hereby incorporate 
by reference the comments filed in CC Docket No. 95-185 to the extent 
relevant to our analysis. In the NPRM, we noted that we had previously 
sought comment on the relationship of these two statutory provisions in 
the LEC-CMRS Interconnection proceeding. In the LEC-CMRS proceeding, we 
tentatively concluded that the Commission has sufficient authority to 
promulgate specific federal requirements for interstate and intrastate 
LEC-CMRS interconnection arrangements, including the adoption of a 
specific interim bill and keep arrangement. However, we reached that 
tentative conclusion before the enactment of the 1996 Act.
2. Discussion
    679. Several parties in this proceeding argue that sections 251 and 
252 provide the exclusive jurisdictional basis for regulation of LEC-
CMRS interconnection rates. Other parties assert that sections 332 and 
201 provide the exclusive jurisdictional basis for regulation of LEC-
CMRS interconnection rates. Some parties have argued that jurisdiction 
resides concurrently under sections 251 and 252, on the one hand, and 
under sections 332 and 201 on the other.
    680. Sections 251, 252, 332 and 201 are designed to achieve the 
common goal of establishing interconnection and ensuring 
interconnection on terms and conditions that are just, reasonable, and 
fair. It is consistent with the broad authority of these provisions to 
hold that we may apply sections 251 and 252 to LEC-CMRS 
interconnection. By opting to proceed under sections 251 and 252, we 
are not finding that section 332 jurisdiction over interconnection has 
been repealed by implication, or rejecting it as an alternative basis 
for jurisdiction. We acknowledge that section 332 in tandem with 
section 201 is a basis for jurisdiction over LEC-CMRS interconnection; 
we simply decline to define the precise extent of that jurisdiction at 
this time.
    681. As a practical matter, sections 251 and 252 create a time-
limited negotiation and arbitration process to ensure that 
interconnection agreements will be reached between incumbent LECs and 
telecommunications carriers, including CMRS providers. We expect that 
our establishment of pricing methodologies and default proxies which 
may be used as interim rates will help expedite the parties' 
negotiations and drive voluntary CMRS-LEC interconnection agreements. 
We also believe that sections 251 and 252 will foster regulatory parity 
in that these provisions establish a uniform regulatory scheme 
governing interconnection between incumbent LECs and all requesting 
carriers, including CMRS providers. Thus, we believe that sections 251 
and 252 will facilitate consistent resolution of interconnection issues 
for CMRS providers and other carriers requesting interconnection.
    682. Although we are applying sections 251 and 252 to LEC-CMRS 
interconnection at this time, we preserve the option to revisit this 
determination in the future. We note that Section 332 generally 
precludes states from rate and entry regulation of CMRS providers, and 
thus, differentiates CMRS providers from other carriers. In passing 
section 332 in 1993, Congress stated that it intended to ``foster the 
growth and development of mobile services that, by their nature, 
operate without regard to state lines as an integral part of the 
national telecommunications infrastructure.'' H.R. Report No. 103-11, 
103d. Cong., 1st Sess. 260 (1993). We also recognize that, based on the 
combined record in CC Docket No. 95-185 and CC Docket No. 96-68, there 
have been instances in which state commissions have treated CMRS 
providers in a discriminatory manner with respect to the terms and 
conditions of interconnection. Should the Commission determine that the 
regulatory scheme established by sections 251 and 252 does not 
sufficiently address the problems encountered by CMRS providers in 
obtaining interconnection on terms and conditions that are just, 
reasonable and nondiscriminatory, the Commission may revisit its 
determination not to invoke jurisdiction under section 332 to regulate 
LEC-CMRS interconnection rates.
    683. Our decision to proceed under section 251 as a basis for 
regulating LEC-CMRS interconnection rates should not be interpreted as 
undercutting our intent to enforce Section 332(c)(3), for example, 
where state regulation of interconnection rates might constitute 
regulation of CMRS entry. In such situations, state action might be 
precluded by either section 332 or section 253. Such circumstances 
would require a case-by-case evaluation. We note, however, that we are 
aware of numerous specific state requirements that may constitute CMRS 
entry or rate regulation preempted by section 332. For example, many 
states, such as California, require all telecommunications providers to 
certify that the public convenience and necessity will be served as a 
precondition to construction and operation of telecommunications 
services within the state. CAL. PUBLIC UTILITIES CODE Sections 
1001,1005 (West 1995); ALASKA STAT. Section 42.05221 (1995); CONN. GEN. 
STAT. Section 16-247g (1995); HAW. REV. STAT. Section 269-7.5 (1995); 
NEB. REV. STAT. Section 86-805 (1995); N.M. STAT. ANN. Section 63-9B-4 
(Michie 1996). Some states, such as Alaska and Connecticut, also 
require CMRS providers to certify as service providers other than CMRS 
in order to obtain the same treatment afforded other telecommunications 
providers under state law. See In the Matter of Motion for a 
Declaratory Ruling Concerning Preemption of Alaska Call Routing and 
Interexchange Certification Regulation as Applies to Cellular Carriers, 
File No. WTB/POL 95-2, Motion for a Declaratory Ruling, Alaska-3 
Cellular d/b/a CellularOne, p.5, para. 11 (filed Sept. 22, 1995); 
Decision, Investigation Into Wireless Mutual Compensation Plans, State 
of Connecticut, Department of Public Utility control, at 15 
(Connecticut Commission Sept. 22, 1995). Hawaii and Louisiana, in 
addition to imposing a certification requirement, require CMRS 
providers and other telecommunications carriers to file tariffs with 
the state commission. HAW. REV. STAT. Section 6-80-29 (1996); see In re 
Regulations for Competition in the Local Telecommunications Market, 
General

[[Page 45577]]

Order, Louisiana Public Service Commission, Secs. 301, 401 (Louisiana 
Commission March 15, 1996). We will not permit entry regulation through 
the exercise of states' sections 251/252 authority or otherwise. In 
this regard, we note that states may not impose on CMRS carriers rate 
and entry regulation as a pre-condition to participation in 
interconnection agreements that may be negotiated and arbitrated 
pursuant to sections 251 and 252. We further note that the Commission 
is reviewing filings made pursuant to section 253 alleging that 
particular states or local governments have requirements that 
constitute entry barriers, in violation of section 253. We will 
continue to review any allegations on an ongoing basis, including any 
claims that states or local governments are regulating entry or 
imposing requirements on CMRS providers that constitute barriers to 
market entry.

XI. Obligations Imposed on LECs by Section 251(b)

A. Reciprocal Compensation for Transport and Termination of 
Telecommunications

1. Statutory Language
    684. Section 251(b)(5) provides that all LECs, including incumbent 
LECs, have the duty to ``establish reciprocal compensation arrangements 
for the transport and termination of telecommunications.'' Section 
252(d)(2) states that, for the purpose of compliance by an incumbent 
LEC with section 251(b)(5), a state commission shall not consider the 
terms and conditions for reciprocal compensation to be just and 
reasonable unless such terms and conditions both: (1) provide for the 
``mutual and reciprocal recovery by each carrier of costs associated 
with the transport and termination on each carrier's network facilities 
of calls that originate on the network facilities of the other 
carrier,'' and (2) ``determine such costs on the basis of a reasonable 
approximation of the additional costs of terminating such calls.'' That 
subsection further provides that the foregoing language shall not be 
construed ``to preclude arrangements that afford the mutual recovery of 
costs through the offsetting of reciprocal obligations, including 
arrangements that waive mutual recovery (such as bill and keep 
arrangements),'' or to authorize the Commission or any state to 
``engage in any rate regulation proceeding to establish with 
particularity the additional costs of transporting or terminating 
calls, or require carriers to maintain records with respect to the 
additional costs of such calls.'' The legislative history indicates 
that ``mutual and reciprocal recovery of costs * * * may include a 
range of compensation schemes, such as in-kind exchange of traffic 
without cash payment (known as bill-and-keep arrangements).''
2. Definition of Transport and Termination of Telecommunications
a. Background
    685. In the NPRM, we sought comment on whether ``transport and 
termination of telecommunications'' under section 251(b)(5) is limited 
to certain types of traffic. We noted that the statutory provision 
appears to encompass telecommunications traffic that originates on the 
network of one LEC and terminates on the network of a competing 
provider in the same local service area as well as traffic passing 
between LECs and CMRS providers. We sought comment on whether section 
251(b)(5) also encompasses telecommunications traffic passing between 
neighboring LECs that do not compete with one another. We also observed 
in the NPRM that section 252(d)(2) is entitled ``Charges for Transport 
and Termination of Traffic,'' and it could be interpreted to permit 
separate charges for these two components of reciprocal compensation. 
We sought comment on this issue.
b. Discussion
(1) Distinction Between ``Transport and Termination'' and Access
    686. We recognize that transport and termination of traffic, 
whether it originates locally or from a distant exchange, involves the 
same network functions. Ultimately, we believe that the rates that 
local carriers impose for the transport and termination of local 
traffic and for the transport and termination of long distance traffic 
should converge. We conclude, however, as a legal matter, that 
transport and termination of local traffic are different services than 
access service for long distance telecommunications. Transport and 
termination of local traffic for purposes of reciprocal compensation 
are governed by sections 251(b)(5) and 252(d)(2), while access charges 
for interstate long-distance traffic are governed by sections 201 and 
202 of the Act. The Act preserves the legal distinctions between 
charges for transport and termination of local traffic and interstate 
and intrastate charges for terminating long-distance traffic.
    687. We conclude that section 251(b)(5) reciprocal compensation 
obligations should apply only to traffic that originates and terminates 
within a local area, as defined in the following paragraph. We disagree 
with Frontier's contention that section 251(b)(5) entitles an IXC to 
receive reciprocal compensation from a LEC when a long-distance call is 
passed from the LEC serving the caller to the IXC. Access charges were 
developed to address a situation in which three carriers--typically, 
the originating LEC, the IXC, and the terminating LEC--collaborate to 
complete a long-distance call. As a general matter, in the access 
charge regime, the long-distance caller pays long-distance charges to 
the IXC, and the IXC must pay both LECs for originating and terminating 
access service. In addition, both the caller and the party receiving 
the call pay a flat-rated interstate access charge--the end-user common 
line charge--to the respective incumbent LEC to whose network each of 
these parties is connected. By contrast, reciprocal compensation for 
transport and termination of calls is intended for a situation in which 
two carriers collaborate to complete a local call. In this case, the 
local caller pays charges to the originating carrier, and the 
originating carrier must compensate the terminating carrier for 
completing the call. This reading of the statute is confirmed by 
section 252(d)(2)(A)(i), which establishes the pricing standards for 
section 251(b)(5). Section 251(d)(2)(A)(i) provides for ``recovery by 
each carrier of costs associated with the transport and termination on 
each carrier's network facilities of calls that originate on the 
network facilities of the other carrier.'' We note that our conclusion 
that long distance traffic is not subject to the transport and 
termination provisions of section 251 does not in any way disrupt the 
ability of IXCs to terminate their interstate long-distance traffic on 
LEC networks. Pursuant to section 251(g), LECs must continue to offer 
tariffed interstate access services just as they did prior to enactment 
of the 1996 Act. We find that the reciprocal compensation provisions of 
section 251(b)(5) for transport and termination of traffic do not apply 
to the transport or termination of interstate or intrastate 
interexchange traffic.
    688. With the exception of traffic to or from a CMRS network, state 
commissions have the authority to determine what geographic areas 
should be considered ``local areas'' for the purpose of applying 
reciprocal compensation obligations under section 251(b)(5), consistent 
with the state commissions' historical practice of defining local 
service areas for wireline LECs. Traffic originating or terminating

[[Page 45578]]

outside of the applicable local area would be subject to interstate and 
intrastate access charges. We expect the states to determine whether 
intrastate transport and termination of traffic between competing LECs, 
where a portion of their local service areas are not the same, should 
be governed by section 251(b)(5)'s reciprocal compensation obligations 
or whether intrastate access charges should apply to the portions of 
their local service areas that are different. This approach is 
consistent with a recently negotiated interconnection agreement between 
Ameritech and ICG that restricted reciprocal compensation arrangements 
to the local traffic area as defined by the state commission. 
Continental Cablevision, in an ex parte letter, states that many 
incumbent LECs offer optional expanded local area calling plans, in 
which customers may pay an additional flat rate charge for calls within 
a wider area than that deemed as local, but that terminating intrastate 
access charges typically apply to calls that originate from competing 
carriers in the same wider area. Continental Cablevision argues that 
local transport and termination rates should apply to these calls. We 
lack sufficient record information to address the issue of expanded 
local area calling plans; we expect that this issue will be considered, 
in the first instance, by state commissions. In addition, we expect the 
states to decide whether section 251(b)(5) reciprocal compensation 
provisions apply to the exchange of traffic between incumbent LECs that 
serve adjacent service areas.
    689. On the other hand, in light of this Commission's exclusive 
authority to define the authorized license areas of wireless carriers, 
we will define the local service area for calls to or from a CMRS 
network for the purposes of applying reciprocal compensation 
obligations under section 251(b)(5). Different types of wireless 
carriers have different FCC-authorized licensed territories, the 
largest of which is the ``Major Trading Area'' (MTA). See Rand McNally, 
Inc., 1992 Commercial Atlas & Marketing Guide 38-39 (1992). Because 
wireless licensed territories are federally authorized, and vary in 
size, we conclude that the largest FCC-authorized wireless license 
territory (i.e., MTA) serves as the most appropriate definition for 
local service area for CMRS traffic for purposes of reciprocal 
compensation under section 251(b)(5) as it avoids creating artificial 
distinctions between CMRS providers. Accordingly, traffic to or from a 
CMRS network that originates and terminates within the same MTA is 
subject to transport and termination rates under section 251(b)(5), 
rather than interstate and intrastate access charges.
    690. We conclude that section 251(b)(5) obligations apply to all 
LECs in the same state-defined local exchange service areas, including 
neighboring incumbent LECs that fit within this description. Contrary 
to the arguments of NYNEX and Pacific Telesis, neither the plain 
language of the Act nor its legislative history limits this subsection 
to the transport and termination of telecommunications traffic between 
new entrants and incumbent LECs. In addition, applying section 
251(b)(5) obligations to neighboring incumbent LECs in the same local 
exchange area is consistent with our decision that all interconnection 
agreements, including agreements between neighboring LECs, must be 
submitted to state commissions for approval pursuant to section 252(e).
    691. Under section 252, neighboring states may establish different 
rate levels for transport and termination of traffic. In cases in which 
territory in multiple states is included in a single local service 
area, and a local call from one carrier to another crosses state lines, 
we conclude that the applicable rate for any particular call should be 
that established by the state in which the call terminates. This 
provides an administratively convenient rule, and termination of the 
call typically occurs in the same state where the terminating carrier's 
end office switch is located and where the cost of terminating the call 
is incurred.
 (2) Distinction Between ``Transport'' and ``Termination''
    692. We conclude that transport and termination should be treated 
as two distinct functions. We define ``transport,'' for purposes of 
section 251(b)(5), as the transmission of terminating traffic that is 
subject to section 251(b)(5) from the interconnection point between the 
two carriers to the terminating carrier's end office switch that 
directly serves the called party (or equivalent facility provided by a 
non-incumbent carrier). Many alternative arrangements exist for the 
provision of transport between the two networks. These arrangements 
include: dedicated circuits provided either by the incumbent LEC, the 
other local service provider, separately by each, or jointly by both; 
facilities provided by alternative carriers; unbundled network elements 
provided by incumbent LECs; or similar network functions currently 
offered by incumbent LECs on a tariffed basis. Charges for transport 
subject to section 251(b)(5) should reflect the forward-looking cost of 
the particular provisioning method.
    693. We define ``termination,'' for purposes of section 251(b)(5), 
as the switching of traffic that is subject to section 251(b)(5) at the 
terminating carrier's end office switch (or equivalent facility) and 
delivery of that traffic from that switch to the called party's 
premises. In contrast to transport, for which some alternatives exist, 
alternatives for termination are not likely to exist in the near term. 
A carrier or provider typically has no other mechanism for delivering 
traffic to a called party served by another carrier except by having 
that called party's carrier terminate the call. In addition, forward-
looking costs are calculated differently for the transport of traffic 
and the termination of traffic, as discussed above in the unbundled 
elements section. As such, we conclude that we need to treat transport 
and termination as separate functions--each with its own cost. With 
respect to GST's contention that separate charges for transport and 
termination of traffic will allow incumbent LECs to ``game'' the system 
through network design decisions, we conclude in the interconnection 
section above that interconnecting carriers may interconnect at any 
technically feasible point. We find that this sufficiently limits LECs' 
ability to disadvantage interconnecting parties through their network 
design decisions.
(3) CMRS-Related Issues
    694. Section 251(b)(5) obligates LECs to establish reciprocal 
compensation arrangements for the transport and termination of 
telecommunications traffic. Although section 252(b)(5) does not 
explicitly state to whom the LEC's obligation runs, we find that LECs 
have a duty to establish reciprocal compensation arrangements with 
respect to local traffic originated by or terminating to any 
telecommunications carriers. CMRS providers are telecommunications 
carriers and, thus, LECs' reciprocal compensation obligations under 
section 251(b)(5) apply to all local traffic transmitted between LECs 
and CMRS providers.
    695. We conclude that, pursuant to section 251(b)(5), a LEC may not 
charge a CMRS provider or other carrier for terminating LEC-originated 
traffic. Section 251(b)(5) specifies that LECs and interconnecting 
carriers shall compensate one another for termination of traffic on a 
reciprocal basis. This section does not address charges payable to a 
carrier that originates traffic. We therefore conclude that

[[Page 45579]]

section 251(b)(5) prohibits charges such as those some incumbent LECs 
currently impose on CMRS providers for LEC-originated traffic. As of 
the effective date of this order, a LEC must cease charging a CMRS 
provider or other carrier for terminating LEC-originated traffic and 
must provide that traffic to the CMRS provider or other carrier without 
charge.
    696. As noted above, CMRS providers' license areas are established 
under federal rules, and in many cases are larger than the local 
exchange service areas that state commissions have established for 
incumbent LECs' local service areas. We reiterate that traffic between 
an incumbent LEC and a CMRS network that originates and terminates 
within the same MTA (defined based on the parties' locations at the 
beginning of the call) is subject to transport and termination rates 
under section 251(b)(5), rather than interstate or intrastate access 
charges. Under our existing practice, most traffic between LECs and 
CMRS providers is not subject to interstate access charges unless it is 
carried by an IXC, with the exception of certain interstate 
interexchange service provided by CMRS carriers, such as some 
``roaming'' traffic that transits incumbent LECs' switching facilities, 
which is subject to interstate access charges. ``[S]ome cellular 
carriers provide their customers with a service whereby a call to a 
subscriber's local cellular number will be routed to them over 
interstate facilities when the customer is ``roaming'' in a cellular 
system in another state. In this case, the cellular carrier is 
providing not local exchange service but interstate, interexchange 
service. In this and other situations where a cellular company is 
offering interstate, interexchange service, the local telephone company 
providing interconnection is providing exchange access to an 
interexchange carrier and may expect to be paid the appropriate access 
charge. * * * Therefore, to the extent that a cellular operator does 
provide interexchange service through switching facilities provided by 
a telephone company, its obligation to pay carrier's carrier [i.e., 
access] charges is defined by Sec. 69.5(b) of our rules.'' See 
Regulatory Treatment of Mobile Services Second Report and Order, 59 FR 
18493 (April 19, 1994). Based on our authority under section 251(g) to 
preserve the current interstate access charge regime, we conclude that 
the new transport and termination rules should be applied to LECs and 
CMRS providers so that CMRS providers continue not to pay interstate 
access charges for traffic that currently is not subject to such 
charges, and are assessed such charges for traffic that is currently 
subject to interstate access charges.
    697. CMRS customers may travel from location to location during the 
course of a single call, which could make it difficult to determine the 
applicable transport and termination rate or access charge. In the LEC-
CMRS Interconnection NPRM, we observed that a significant amount of 
LEC-CMRS traffic crosses state lines, because CMRS service areas often 
cross state lines and CMRS customers are mobile. LEC-CMRS 
Interconnection NPRM, 61 FR 3644 (February 1, 1996). We recognize that, 
using current technology, it may be difficult for CMRS providers to 
determine, in real time, which cell site a mobile customer is connected 
to, let alone the customer's specific geographic location. Enhanced 911 
Emergency Calling Systems Report and Order and Further NPRM, 61 FR 
40374 (August 2, 1996). This could complicate the computation of 
traffic flows and the applicability of transport and termination rates, 
given that in certain cases, the geographic locations of the calling 
party and the called party determine whether a particular call should 
be compensated under transport and termination rates established by one 
state or another, or under interstate or intrastate access charges. We 
conclude, however, that it is not necessary for incumbent LECs and CMRS 
providers to be able to ascertain geographic locations when determining 
the rating for any particular call at the moment the call is connected. 
We conclude that parties may calculate overall compensation amounts by 
extrapolating from traffic studies and samples. For administrative 
convenience, the location of the initial cell site when a call begins 
shall be used as the determinant of the geographic location of the 
mobile customer. As an alternative, LECs and CMRS providers can use the 
point of interconnection between the two carriers at the beginning of 
the call to determine the location of the mobile caller or called 
party.
    698. As discussed above, pursuant to section 251(b)(5) of the Act, 
all local exchange carriers, including small incumbent LECs and small 
entities offering competitive local exchange services, have a duty to 
establish reciprocal compensation arrangements for the transport and 
termination of local exchange service. CMRS providers, including small 
entities, and LECs, including small incumbent LECs and small entity 
competitive LECs, will receive reciprocal compensation for terminating 
certain traffic that originates on the networks of other carriers, and 
will pay such compensation for certain traffic that they transmit and 
terminate to other carriers. We believe that these arrangements should 
benefit all carriers, including small incumbent LECs and small 
entities, because it will facilitate competitive entry into new markets 
while ensuring reasonable compensation for the additional costs 
incurred in terminating traffic that originates on other carriers' 
networks. We also recognize that, to implement transport and 
termination pursuant to section 251(b)(5), carriers, including small 
incumbent LECs and small entities, may be required to measure the 
exchange of traffic, but we believe that the cost of such measurement 
to these carriers is likely to be substantially outweighed by the 
benefits of these arrangements.
3. Pricing Methodology
a. Background
    699. In the NPRM, we sought comment on how to interpret section 
252(d)(2) of the Act. Specifically, we asked if we should establish a 
generic pricing methodology or impose a ceiling to guide the states in 
setting the charge for the transport and termination of traffic. We 
also asked whether such a generic pricing methodology or ceiling should 
be established using the same principles we adopt for interconnection 
and unbundled elements. Additionally, we sought comment on the use of 
an interim and transitional pricing mechanism that would address 
concerns about unequal bargaining power in negotiations.
b. Discussion
(1) Statutory Standard
    700. We conclude that the pricing standards established by section 
252(d)(1) for interconnection and unbundled elements, and by section 
252(d)(2) for transport and termination of traffic, are sufficiently 
similar to permit the use of the same general methodologies for 
establishing rates under both statutory provisions. Section 252(d)(2) 
states that reciprocal compensation rates for transport and termination 
shall be based on ``a reasonable approximation of the additional costs 
of terminating such calls.'' Moreover, there is some substitutability 
between the new entrant's use of unbundled network elements for 
transporting traffic and its use of transport under section 252(d)(2). 
Depending on the interconnection arrangements, carriers may transport 
traffic to the competing carriers' end offices or hand traffic off to 
competing carriers at meet points for termination

[[Page 45580]]

on the competing carriers' networks. Transport of traffic for 
termination on a competing carrier's network is, therefore, largely 
indistinguishable from transport for termination of calls on a 
carrier's own network. Thus, we conclude that transport of traffic 
should be priced based on the same cost-based standard, whether it is 
transport using unbundled elements or transport of traffic that 
originated on a competing carrier's network. We, therefore, find that 
the ``additional cost'' standard permits the use of the forward-
looking, economic cost-based pricing standard that we are establishing 
for interconnection and unbundled elements.
(2) Pricing Rule
    701. States have three options for establishing transport and 
termination rate levels. A state commission may conduct a thorough 
review of economic studies prepared using the TELRIC-based methodology 
outlined above in the section on the pricing of interconnection and 
unbundled elements. Alternatively, the state may adopt a default price 
pursuant to the default proxies outlined below. If the state adopts a 
default price, it must either commence review of a TELRIC-based 
economic cost study, request that this Commission review such a study, 
or subsequently modify the default price in accordance with any revised 
proxies we may adopt. As previously noted, we intend to commence a 
future rulemaking on developing proxies using a generic cost model, and 
to complete such proceeding in the first quarter of 1997. As a third 
alternative, in some circumstances states may order a ``bill and keep'' 
arrangement, as discussed below.
(3) Cost-Based Pricing Methodology
    702. Consistent with our conclusions about the pricing of 
interconnection and unbundled network elements, we conclude that states 
that elect to set rates through a cost study must use the forward-
looking economic cost-based methodology, which is described in greater 
detail above, in establishing rates for reciprocal transport and 
termination when arbitrating interconnection arrangements. We find that 
section 252(d)(2)(B)(ii), which indicates that section 252(d)(2) shall 
not be construed to ``authorize the Commission or any State to engage 
in any rate regulation proceeding to establish with particularity the 
additional costs of transporting or terminating calls,'' does not 
preclude states or this Commission from reviewing forward-looking 
economic cost studies. First, we believe that Congress intended the 
term ``rate regulation proceeding'' in section 252(d)(2)(B)(ii) to mean 
the same thing as ``a rate-of-return or other rate-based proceeding'' 
in section 252(d)(1)(A)(i). In the section on the pricing of 
interconnection and unbundled elements above, we conclude that the 
statutory prohibition of the use of such proceedings is intended to 
foreclose the use of traditional rate case proceedings using rate-of-
return regulation. Moreover, forward-looking economic cost studies 
typically involve ``a reasonable approximation of the additional 
cost,'' rather than determining such costs ``with particularity,'' such 
as by measuring labor costs with detailed time and motion studies.
    703. We find that, once a call has been delivered to the incumbent 
LEC end office serving the called party, the ``additional cost'' to the 
LEC of terminating a call that originates on a competing carrier's 
network primarily consists of the traffic-sensitive component of local 
switching. The network elements involved with the termination of 
traffic include the end-office switch and local loop. The costs of 
local loops and line ports associated with local switches do not vary 
in proportion to the number of calls terminated over these facilities. 
The duty to terminate calls that originate on the network of a 
competitor does not directly affect the number of calls routed to a 
particular end user and any costs that result from inadequate loop 
capacity are, therefore, not considered ``additional costs.'' We 
conclude that such non-traffic sensitive costs should not be considered 
``additional costs'' when a LEC terminates a call that originated on 
the network of a competing carrier. For the purposes of setting rates 
under section 252(d)(2), only that portion of the forward-looking, 
economic cost of end-office switching that is recovered on a usage-
sensitive basis constitutes an ``additional cost'' to be recovered 
through termination charges.
    704. Rates for termination established pursuant to a TELRIC-based 
methodology may recover a reasonable allocation of common costs. A rate 
equal to incremental costs may not compensate carriers fully for 
transporting and terminating traffic when common costs are present. We 
therefore reject the argument by some commenters that ``additional 
costs'' may not include a reasonable allocation of forward-looking 
common costs. We recognize that, as noted by Time Warner, call 
termination is an essential element in completing calls because 
competitors are required to use the incumbent LECs' existing networks 
to terminate calls to incumbent LEC customers. The 1996 Act envisions a 
seamless interconnection of competing networks, rather than the 
development of redundant, ubiquitous networks throughout the nation. In 
order to terminate traffic ubiquitously to other companies' local 
customers, all LECs are given the right to use termination services 
from those companies rather than construct facilities to everyone. 
While, on the originating end, carriers have different options to reach 
their revenue-paying customers--including their own network facilities, 
purchasing access to unbundled elements of the incumbent LEC, or 
resale--they have no realistic alternatives for terminating traffic 
destined for competing carriers' subscribers other than to use those 
carriers' networks. Thus, all carriers--incumbent LECs as well as 
competing carriers--have a greater incentive and opportunity to charge 
prices in excess of economically efficient levels on the terminating 
end. To ensure that rates for reciprocal compensation make possible 
efficient competitive entry, we conclude that termination rates should 
include an allocation of forward-looking common costs that is no 
greater proportionally than that allocated to unbundled local loops, 
which, as discussed above, should be relatively low. Additionally, we 
conclude that rates for the transport and termination of traffic shall 
not include an element that allows incumbent LECs to recover any lost 
contribution to basic, local service rates represented by the 
interconnecting carriers' service, because such an element would be 
inconsistent with the statutory requirement that rates for transport 
and termination be based on additional costs. In the section addressing 
prices for unbundled elements we conclude that the ECPR, which would 
allow incumbent LECs to recover such lost contributions, or collection 
of universal service costs through interconnection rates, leads to 
significant distortions in markets when existing retail prices are not 
cost-based.
    705. We also address the impact on small incumbent LECs. For 
example, the Western Alliance argues that it is especially important 
for small LECs to recover lost contributions and common costs through 
termination charges. We have considered the economic impact of our 
rules in this section on small incumbent LECs. For example, we conclude 
that termination rates for all LECs should include an allocation of 
forward-looking common costs, but find that the inclusion of an element 
for the

[[Page 45581]]

recovery of lost contribution may lead to significant distortions in 
local exchange markets. We also note that certain small incumbent LECs 
are not subject to our rules under section 251(f)(1) of the 1996 Act, 
unless otherwise determined by a state commission, and certain other 
small incumbent LECs may seek relief from their state commissions from 
our rules under section 251(f)(2) of the 1996 Act.
(4) Default Proxies
    706. As with unbundled network elements, we recognize that it may 
not be feasible for some state commissions conducting or reviewing 
economic studies to establish transport and termination rates using our 
TELRIC-based pricing methodology within the time required for the 
arbitration process, particularly given some states' resource 
limitations. Thus, for the time being, we adopt a default price range 
of 0.2 cents ($0.002) to 0.4 cents ($0.004) per minute of use for calls 
handed off at the end-office switch. This default price range is based 
on the same proxies that apply to local switching as an unbundled 
network element. In establishing end-office termination rates, states 
may adopt a default termination price that is within our default price 
range or at either of the end points of the range. States should 
articulate the basis for selecting a particular price within this 
range. Thus, in arbitration proceedings, states must set the price for 
end office termination of traffic by: (1) using a forward-looking, 
economic cost study that complies with the forward-looking, economic-
cost methodology set forth above; or (2) adopting a price less than or 
equal to 0.4 cents ($0.004) per minute, and greater than or equal to 
0.2 cents ($0.002) per minute, pending the completion of such a 
forward-looking, economic cost study. We observe that the most credible 
studies in the record before us fall at the lower end of this range, 
and we encourage states to consider such evidence in their analysis. 
The adoption of a range of rates to serve as a default price range for 
interconnection agreements being arbitrated by the states provides 
carriers with a clearer understanding of the terms and conditions that 
will govern them if they fail to reach an agreement and helps to reduce 
the transaction costs of arbitration and litigation. We also find that 
states that have already adopted end-office termination rates based on 
an approach other than a full forward-looking cost study, either 
through arbitration or rulemaking proceedings, may keep such rates in 
effect, pending their review of a forward-looking cost study, as long 
as they do not exceed 0.5 cents ($0.005) per minute. As discussed 
below, a state may also order a ``bill and keep'' arrangement subject 
to certain limitations. Additionally, our adoption of a default price 
range temporarily relieves small and mid-sized carriers from the burden 
of conducting forward-looking economic cost studies.
    707. Similarly, in establishing transport rates under sections 
251(b)(5) and 252(d)(2), state commissions should be guided by the 
price proxies that we are establishing for unbundled transport elements 
discussed above. States should explain the basis for selecting a 
particular default price subject to the applicable ceiling. 
Specifically, when interconnecting carriers hand off traffic at an 
incumbent LEC's tandem switch (or equivalent facilities of a carrier 
other than an incumbent LEC), the rates for the tandem switching and 
transmission from the tandem switch to end offices--a portion of the 
``transport'' component of transport and termination rates-- should be 
subject to the proxies that apply to the analogous unbundled network 
elements. Thus, for the time being, when states set rates for tandem 
switching under section 252(d)(2), they may set a default price at or 
below the default price ceiling that applies to the tandem switching 
unbundled element as an alternative to reviewing a forward-looking 
economic cost study using our TELRIC methodology. Similarly, when 
states set rates for transmission facilities between tandem switches 
and end offices, they may establish rates equal to the default prices 
we are adopting for such transmission, as discussed above in the 
section on unbundled elements.
    708. Finally, in establishing the rates for transmission facilities 
that are dedicated to the transmission of traffic between two networks, 
state commissions should be guided by the default price level we are 
adopting for the unbundled element of dedicated transport. For such 
dedicated transport, we can envision several scenarios involving a 
local carrier that provides transmission facilities (the ``providing 
carrier'') and another local carrier with which it interconnects (the 
``interconnecting carrier''). The amount an interconnecting carrier 
pays for dedicated transport is to be proportional to its relative use 
of the dedicated facility. For example, if the providing carrier 
provides one-way trunks that the interconnecting carrier uses 
exclusively for sending terminating traffic to the providing carrier, 
then the interconnecting carrier is to pay the providing carrier a rate 
that recovers the full forward-looking economic cost of those trunks. 
The interconnecting carrier, however, should not be required to pay the 
providing carrier for one-way trunks in the opposite direction, which 
the providing carrier owns and uses to send its own traffic to the 
interconnecting carrier. Under an alternative scenario, if the 
providing carrier provides two-way trunks between its network and the 
interconnecting carrier's network, then the interconnecting carrier 
should not have to pay the providing carrier a rate that recovers the 
full cost of those trunks. These two-way trunks are used by the 
providing carrier to send terminating traffic to the interconnecting 
carrier, as well as by the interconnecting carrier to send terminating 
traffic to the providing carrier. Rather, the interconnecting carrier 
shall pay the providing carrier a rate that reflects only the 
proportion of the trunk capacity that the interconnecting carrier uses 
to send terminating traffic to the providing carrier. This proportion 
may be measured either based on the total flow of traffic over the 
trunks, or based on the flow of traffic during peak periods. Carriers 
operating under arrangements which do not comport with the principles 
we have set forth above, shall be entitled to convert such arrangements 
so that each carrier is only paying for the transport of traffic it 
originates, as of the effective date of this order.
(5) Rate Structure
    709. Nearly all commenters agree that flat rates, rather than 
usage-sensitive rates, should apply to the purchase of dedicated 
facilities. As discussed in the NPRM, economic efficiency may generally 
be maximized when non-traffic sensitive services, such as the use of 
dedicated facilities for the transport of traffic, are priced on a 
flat-rated basis. We, therefore, require all interconnecting parties to 
be offered the option of purchasing dedicated facilities, for the 
transport of traffic, on a flat-rated basis. As discussed by Lincoln 
Telephone, the connection between an incumbent LEC's end or tandem 
office and an interconnecting LEC's network is likely to be a dedicated 
facility. We recognize that the facility itself can be provided in a 
number of different ways--by use of two service providers, by the other 
carrier, or jointly in a meet-point arrangement. We conclude first 
that, no matter what the specific arrangements, these costs should be 
recovered in a cost-causative manner and that usage-based charges 
should be limited to situations where costs are usage sensitive. In 
cases going to arbitration and in reviewing BOC statements of terms and 
conditions, the

[[Page 45582]]

carrier actually providing the facility should presumptively be 
entitled to a rate that is set based on the forward-looking economic 
cost of providing the portion of the facility that is used for 
terminating traffic that originates on the network of a competing 
carrier. We recognize that negotiated agreements may incorporate flat-
rated charges when it is efficient to do so and find that the presence 
of the arbitration default rule is likely to lead parties to negotiate 
efficient rate structures.
    710. We recognize that the costs of transporting and terminating 
traffic during peak and off-peak hours may not be the same. As 
suggested by the Massachusetts Attorney General, rates that are the 
same during peak and off-peak hours may not reflect the cost of using 
the network and could lead to inefficient use of the network. The 
differences in the cost of transporting and terminating traffic during 
peak and off-peak hours, however, are likely to vary depending on the 
network, and the amount and type of traffic terminated at a particular 
switch. For example, peak periods may vary within a local service area 
depending upon whether the switch is located in a business or 
residential area. As a result, there may be administrative difficulties 
in establishing peak-load pricing schemes that may outweigh the 
benefits of such schemes. The negotiating parties, however, are likely 
to be in a position to more accurately determine how traffic patterns 
will adjust to peak-load pricing schemes and we encourage parties to 
address such pricing schemes in the negotiation process. For similar 
reasons, we neither require nor forbid states from adopting rates that 
reflect peak and off-peak costs. We hope some states will evaluate the 
benefits and costs of pricing schemes that consist of different rates 
for peak and off-peak traffic. We do require, however, that peak-load 
pricing schemes, adopted through the arbitration process, comply with 
our default price level if not based on a forward-looking cost study 
(e.g., the average rate, weighted by the projected relative minutes of 
use during peak and off-peak periods, should fall within our default 
price range of 0.2 to 0.4 cents or the level determined by an 
incremental cost study).
(6) Interim Transport and Termination Rate Levels
    711. We are concerned that some new entrants that do not already 
have interconnection arrangements with incumbent LECs may face delays 
in initiating service solely because of the need to negotiate transport 
and termination arrangements with the incumbent LEC. In particular, a 
new entrant that has already constructed facilities may have a 
relatively weak bargaining position because it may be forced to choose 
either to accept transport and termination rates not in accord with 
these rules or to delay its commencement of service until the 
conclusion of the arbitration and state approval process. To promote 
the Act's goal of rapid competition in the local exchange, we order 
incumbent LECs upon request from new entrants to provide transport and 
termination of traffic, on an interim basis, pending resolution of 
negotiation and arbitration regarding transport and termination prices, 
and approval by the state commission. A carrier may take advantage of 
this interim arrangement only after it has requested negotiation with 
the incumbent LEC. The interim arrangement shall cease to be in effect 
when one of the following occurs: (1) an agreement has been negotiated 
and approved; (2) an agreement has been arbitrated and approved; or (3) 
the period for requesting arbitration has passed with no such request. 
We also conclude that interim prices for transport and termination 
shall be symmetrical. Because the purpose of this interim termination 
requirement is to permit parties without existing interconnection 
agreements to enter the market expeditiously, this requirement shall 
not apply with respect to requesting carriers that have existing 
interconnection arrangements that provide for termination of local 
traffic by the incumbent LEC. The ability to interconnect with an 
incumbent LEC prior to the completion of a forward-looking, economic 
cost study, based on an interim presumptive price ceiling, allows 
carriers, including small entrants, to enter into local exchange 
service expeditiously.
    712. In states that have already conducted or reviewed forward-
looking economic cost studies and promulgated transport and termination 
rates based on such studies, an incumbent LEC receiving a request for 
interim transport and termination shall use these state-determined 
rates as interim transport and termination rates. In states that have 
not conducted or reviewed a forward-looking economic cost study, but 
have set rates for transport and termination of traffic consistent with 
the default price ranges and ceilings discussed above, an incumbent LEC 
shall use these state-determined rates as interim rates. In states that 
have neither set rates consistent with the default price ceilings and 
ranges nor reviewed or conducted forward-looking economic cost studies, 
we must establish an interim default price in order to facilitate rapid 
competition in the local exchange market. In those states, an incumbent 
LEC shall set interim rates at the default ceilings for end-office 
switching (0.4 cents per minute of use), tandem switching (0.15 cents 
per minute of use), and transport described above. Using the ceiling as 
a default interim price, pending a state commission's completion of a 
forward-looking economic cost analysis, should ensure that both the 
incumbent LEC and the competing provider recovers no less than their 
full transport and termination costs. We note, however, that the most 
credible evidence in the record suggests that the actual forward-
looking economic cost of end-office switching is closer to 0.2 cents 
($0.002) per minute of use than the ceiling of 0.4 cents ($0.004) per 
minute of use. States must adopt ``true-up'' mechanisms to ensure that 
no carrier is disadvantaged by an interim rate that differs from the 
final rate established pursuant to arbitration.
    713. We conclude that section 251, in conjunction with our broad 
rulemaking authority under section 4(i), provides us with authority to 
create interim pricing rules to facilitate market entry. Because 
section 251(d)(1) gives the FCC authority ``to establish regulations to 
implement the requirements of this section,'' we find that section 
251(d)(1) gives the Commission authority to establish interim 
regulations that address the ``just and reasonable'' rates for the 
``reciprocal compensation'' requirement of section 251(b)(5), subject 
to the preservation requirements of section 251(d)(3). Courts have 
upheld our adoption of interim compensation arrangements pursuant to 
our authority under section 4(i) of the 1934 Communications Act on 
numerous occasions in the past. See New England Tel. and Tel. Co. v. 
FCC, 826 F.2d 1101 (D.C. Cir. 1987); North American Telecommunications 
Association v. FCC, 772 F.2d 1092 (7th Cir. 1085); Lincoln Tel. and 
Tel. Co. v. FCC, 659 F.2d (D.C. Cir. 1989). In particular, we have 
authority, under section 4(i), to set interim rates subject to a later 
``true-up'' when final rates are established. ``[T]he Commission's 
establishment of an interim billing and collection arrangement was both 
a helpful and necessary step for the Commission to take in implementing 
its `immediate' interconnection order.'' Lincoln Telephone & Telegraph 
Co. v. FCC, 659 F.2d 1092, 1107 (D.C. Cir. 1981) (upholding Commission 
decision requiring an incumbent LEC to interconnect with MCI 
immediately, in

[[Page 45583]]

order not to delay interconnection, at interim rates subject to later 
adjustment); see also FTC Communications v. FCC, 750 F.2d 226 (2d Cir. 
1984) (affirming Commission's authority under Section 4(i) to set 
interim rates for interconnection between the domestic record carrier, 
Western Union, and international record carriers, subject to an 
accounting order, pending the conclusion of a rulemaking to set 
permanent rates replacing expired, contract-based rates). We therefore 
conclude that the default prices discussed above need not in all 
instances await the conclusion of the negotiation, arbitration, and 
state approval process set forth in section 252, but must nevertheless 
be in accordance with the requirements of section 251(d)(3) preserving 
state access regulations. We also observe that we proposed a similar 
interim transport and termination arrangement, albeit with different 
rate levels, in our NPRM in the LEC-CMRS Interconnection proceeding. 
LEC-CMRS Interconnection NPRM, 61 FR 3644 (February 1, 1996).
    714. We have considered the economic impact of our rules in this 
section on small incumbent LECs. For example, Cincinnati Bell asserts 
that interim mechanisms are not required because large corporations are 
not disadvantaged by unequal bargaining power in negotiations with 
small and mid-size incumbent LECs. We do not adopt Cincinnati Bell's 
position because some new entrants, regardless of their size, that do 
not already have interconnection arrangements with incumbent LECs may 
face delays in initiating service solely because of the need to 
negotiate transport and termination arrangements with the incumbent 
LEC. We believe that the adoption of interim rates, subject to a 
``true-up,'' advances the pro-competitive goals of the statute. We also 
note that certain small incumbent LECs are not subject to our rules 
under section 251(f)(1) of the 1996 Act, unless otherwise determined by 
a state commission, and certain other small incumbent LECs may seek 
relief from their state commissions from our rules under section 
251(f)(2) of the 1996 Act.
4. Symmetry
a. Background
    715. Symmetrical compensation arrangements are those in which the 
rate paid by an incumbent LEC to another telecommunications carrier for 
transport and termination of traffic originated by the incumbent LEC is 
the same as the rate the incumbent LEC charges to transport and 
terminate traffic originated by the other telecommunications carrier. 
Incumbent LECs are not likely to purchase interconnection or unbundled 
elements from competitive LECs, except for termination of traffic, and 
possibly transport. In the NPRM, we sought comment on whether rate 
symmetry requirements are consistent with the statutory requirement 
that rates set by states for transport and termination of traffic be 
based on ``costs associated with the transport and termination on each 
carrier's network facilities of calls that originate on the network 
facilities of the other carrier,'' and ``a reasonable approximation of 
the additional costs of terminating such calls.''
    716. In addition, we noted in the NPRM that the Illinois, Maryland, 
and New York commissions have established different rates for 
termination of traffic on an incumbent LEC's network, depending upon 
whether the traffic is handed off at the incumbent LEC's end office or 
tandem switch. We also observed that California and Michigan have 
established one rate that applies to transport and termination of all 
competing local exchange carrier traffic on incumbent LEC networks, 
regardless of whether the traffic is handed off at the incumbent LEC's 
end office or tandem switch, although this rate does not currently 
apply to CMRS. We, therefore, address whether rates for transport and 
termination should be symmetrical and consist of only a single rate 
regardless of where the call is handed off, or if rates should be 
priced on an element-by-element basis.
    717. In the LEC-CMRS Interconnection NPRM, we sought comment on 
whether incumbent LECs were utilizing their greater bargaining power to 
negotiate with wireless carriers interconnection agreements that did 
not reflect principles of mutual compensation. We sought comment on 
whether we should institute some procedure or mechanism in addition to 
our section 208 enforcement process to ensure that incumbent LECs 
comply with our existing rules requiring mutual compensation. LEC-CMRS 
Interconnection NPRM, 61 FR 3644 (February 1, 1996).
b. Discussion
(1) Symmetry in General
    718. Regardless of whether the incumbent LEC's transport and 
termination prices are set using a TELRIC-based economic cost study or 
a default proxy, we conclude that it is reasonable to adopt the 
incumbent LEC's transport and termination prices as a presumptive proxy 
for other telecommunications carriers' additional costs of transport 
and termination. Both the incumbent LEC and the interconnecting 
carriers usually will be providing service in the same geographic area, 
so the forward-looking economic costs should be similar in most cases. 
We also conclude that using the incumbent LEC's forward-looking costs 
for transport and termination of traffic as a proxy for the costs 
incurred by interconnecting carriers satisfies the requirement of 
section 252(d)(2) that costs be determined ``on the basis of a 
reasonable approximation of the additional costs of terminating such 
calls.'' Using the incumbent LEC's cost studies as proxies for 
reciprocal compensation is consistent with section 252(d)(2)(B)(ii), 
which prohibits ``establishing with particularity the additional costs 
of transporting or terminating calls.'' If both parties are incumbent 
LECs (e.g., an independent LEC and an adjacent BOC), we conclude that 
the larger LEC's forward-looking costs should be used to establish the 
symmetrical rate for transport and termination. We conclude that larger 
LECs are generally in a better position to conduct a forward-looking 
economic cost study than smaller carriers.
    719. We conclude that imposing symmetrical rates based on the 
incumbent LEC's additional forward-looking costs will not substantially 
reduce carriers' incentives to minimize those costs. A symmetric 
compensation rule gives the competing carriers correct incentives to 
minimize its own costs of termination because its termination revenues 
do not vary directly with changes in its own costs. Moreover, 
symmetrical rates based on the incumbent LEC's costs should not 
seriously affect incumbent LECs' incentives to control costs. We expect 
that incumbent LECs will transport and terminate much more traffic that 
originates on their own networks than traffic that originates on 
competing carriers' networks. Even if, under the additional cost 
standard, incumbent LECs were required to reflect any improvements in 
operating efficiency, and consequent cost reductions, in reduced 
termination rates, the cost savings realized by the incumbent LEC are 
likely to be much greater than its reduction in net termination 
revenues, because the majority of traffic transported and terminated is 
likely to be its own. Even if a pass-through of incumbent LEC's cost 
reductions were instantaneous and complete, the number of minutes of 
use on which an incumbent LEC's net termination revenues is assessed is 
much smaller

[[Page 45584]]

than its overall number of minutes of switching and transport. 
Moreover, if a portion of the reduction in costs is specific to 
exchange traffic, under symmetrical rates, the LEC's revenues from 
terminating traffic originating from another local carrier are based on 
the net difference in traffic, which is likely to be much smaller than 
the total traffic it terminates. Consider a situation approximating 
traditional LEC-CMRS interconnection, in which traffic flows are 
substantially unbalanced: let us suppose, of 1,000,000 minutes of use, 
750,000 are CMRS-to-LEC and 250,000 LEC-to-CMRS. Thus, under symmetric 
compensation at 0.3 cents per minute, the LEC receives 0.3 cents times 
500,000, or $1,500.00. If it reduced its per-minute cost, for some 
reason only on terminating CMRS-to-LEC traffic, to 0.2 cents per 
minute, it would save 0.1 cent times 750,000, or $750.00, in reduced 
costs, whereas its terminating revenues would fall by only 0.1 cent 
times 500,000, or $500.00. Thus, it would still have substantial 
incentive to make the cost reduction in question. In situations closer 
to traffic balance, the incentive is even more favorable. And, of 
course, the LEC probably also reduces its cost of switching on many 
millions of other minutes that do not involve other networks at the 
same time. For example, in the case where traffic is balanced, net 
termination charges are zero, a figure that is unaffected by changes in 
the incumbent LEC's costs, and the incumbent LEC is provided with 
correct incentives to minimize termination costs.
    720. We also find that symmetrical rates may reduce an incumbent 
LEC's ability to use its bargaining strength to negotiate excessively 
high termination charges that competitors would pay the incumbent LEC 
and excessively low termination rates that the incumbent LEC would pay 
interconnecting carriers. As discussed by commenters in the LEC-CMRS 
Interconnection proceeding, LECs have used their unequal bargaining 
position to impose asymmetrical rates for CMRS providers and, in some 
instances, have charged CMRS providers origination as well as 
termination charges. On the other hand, symmetrical rates largely 
eliminate such advantages because they require incumbent LECs, as well 
as competing carriers, to pay the same rate for reciprocal 
compensation.
    721. Symmetrical compensation rates are also administratively 
easier to derive and manage than asymmetrical rates based on the costs 
of each of the respective carriers. In addition, we believe that using 
the incumbent LEC's cost studies to establish the presumptive 
symmetrical rates will establish reasonable opportunities for local 
competition, including opportunities for small telecommunications 
companies entering the local exchange market. We have considered the 
economic impact of our rules in this section on small incumbent LECs. 
For example, RTC argues that symmetrical rates do not consider the 
costs involved in the use of another carrier's network. We find, 
however, that incumbent LECs' costs, including small incumbent LECs' 
costs, serve as reasonable proxies for other carriers' costs of 
transport and termination for the purpose of reciprocal compensation. 
We also note that certain small incumbent LECs are not subject to our 
rules under section 251(f)(1) of the 1996 Act, unless otherwise 
determined by a state commission, and certain other small incumbent 
LECs may seek relief from their state commissions from our rules under 
section 251(f)(2) of the 1996 Act. In addition, symmetry will avoid the 
need for small businesses to conduct forward-looking economic cost 
studies in order for the states to arbitrate reciprocal compensation 
disputes.
    722. Given the advantages of symmetrical rates, we direct states to 
establish presumptive symmetrical rates based on the incumbent LEC's 
costs for transport and termination of traffic when arbitrating 
disputes under section 252(d)(2) and in reviewing BOC statements of 
generally available terms and conditions. If a competing local service 
provider believes that its cost will be greater than that of the 
incumbent LEC for transport and termination, then it must submit a 
forward-looking economic cost study to rebut this presumptive 
symmetrical rate. In that case, we direct state commissions, when 
arbitrating interconnection arrangements, to depart from symmetrical 
rates only if they find that the costs of efficiently configured and 
operated systems are not symmetrical and justify a different 
compensation rate. In doing so, however, state commissions must give 
full and fair effect to the economic costing methodology we set forth 
in this order, and create a factual record, including the cost study, 
sufficient for purposes of review after notice and opportunity for the 
affected parties to participate. In the absence of such a cost study 
justifying a departure from the presumption of symmetrical 
compensation, reciprocal compensation for the transport and termination 
of traffic shall be based on the incumbent local exchange carrier's 
cost studies.
    723. We find that the ``additional costs'' incurred by a LEC when 
transporting and terminating a call that originated on a competing 
carrier's network are likely to vary depending on whether tandem 
switching is involved. We, therefore, conclude that states may 
establish transport and termination rates in the arbitration process 
that vary according to whether the traffic is routed through a tandem 
switch or directly to the end-office switch. In such event, states 
shall also consider whether new technologies (e.g., fiber ring or 
wireless networks) perform functions similar to those performed by an 
incumbent LEC's tandem switch and thus, whether some or all calls 
terminating on the new entrant's network should be priced the same as 
the sum of transport and termination via the incumbent LEC's tandem 
switch. Where the interconnecting carrier's switch serves a geographic 
area comparable to that served by the incumbent LEC's tandem switch, 
the appropriate proxy for the interconnecting carrier's additional 
costs is the LEC tandem interconnection rate.
    724. We disagree with TCI's claim that higher charges for routing 
calls through tandem switches rather than directly through incumbent 
LECs' end offices will materially discourage carriers from routing 
traffic through tandem switches, even when it is efficient to do so. 
New entrants will only be encouraged to interconnect at end-office 
switches, rather than tandem switches, when the decrease in incumbent 
LEC transport charges justifies the extra costs incurred by the new 
entrant to route traffic directly through the incumbent LEC's end-
office switches. Carriers will interconnect in a way that minimizes 
their costs of interconnection, including the use of cost-based LEC 
network elements. In addition, the flexibility given to states may 
allow carriers, including small entities, with different network 
architectures to establish rates for terminating calls originating on 
other carriers' networks that are asymmetrical, if they can show that 
the costs of efficiently configured and operated systems are not 
symmetrical and justify different compensation rates, instead of being 
based on competitors' network architectures.
    725. We believe, with respect to interconnection between LECs and 
paging providers, that there should be an exception to our rule that 
states must establish presumptive symmetrical rates based on the 
incumbent LEC's costs for transport and termination of traffic. While 
paging providers, as telecommunications carriers, are entitled to 
mutual compensation for the

[[Page 45585]]

transport and termination of local traffic, and should not be required 
to pay charges for traffic that originates on other carriers' networks, 
we believe that incumbent LECs' forward-looking costs may not be 
reasonable proxies for the costs of paging providers. Paging is 
typically a significantly different service than wireline or wireless 
voice service and uses different types and amounts of equipment and 
facilities. PageNet's own network, for example, is based on a regional 
hub and spoke network that transmits paging calls from radio 
transmitters to provide regional or national coverage. This 
configuration is distinctly different from either LEC wireline 
networks, with their hierarchy of switches and transmission facilities, 
or cellular carriers, with their multiple cells and sophisticated 
systems for handing off calls as a vehicle moves across cell 
boundaries. In addition, most calls terminated by paging companies are 
brief (averaging 15 seconds) in duration and contain no voice message, 
but only an alpha-numeric message of a few characters. Using incumbent 
LEC's costs for termination of traffic as a proxy for paging providers' 
costs, when the LECs' costs are likely higher than paging providers' 
cost, might create uneconomic incentives for paging providers to 
generate traffic simply in order to receive termination compensation. 
Thus, using LEC costs for termination of voice calls thus may not be a 
reasonable proxy for paging costs as the types of switching and 
transport that paging carriers perform are different from those of LECs 
and other voice carriers.
    726. Given the lack of information in the record concerning paging 
providers' costs to terminate local traffic, we have decided to 
initiate a further proceeding to try to determine what an appropriate 
proxy for paging costs would be and, if necessary, to set a specific 
paging default proxy. In the interim, however, in the event that LECs 
and paging companies cannot negotiate agreed-upon rates, we direct 
states, when arbitrating disputes under section 252(d)(2), to establish 
rates for the termination of traffic by paging providers based on the 
forward-looking economic costs of such termination to the paging 
provider. The paging provider seeking termination fees must prove to 
the state commission the costs of terminating local calls. Given the 
lack of information in the record concerning paging providers' costs, 
we further conclude that the default price for termination of traffic 
from the end office that we adopt in this proceeding in Section 
XI.B.3., supra, does not apply to termination of traffic by paging 
providers. This default price is based on estimates in the record of 
the costs to LECs of termination from the end office or end-office 
switching. There are no such estimates with respect to paging in the 
record, and as discussed above, we find that estimates of LEC costs may 
not reflect paging providers' costs.
(2) Existing Non-Reciprocal Agreements Between Incumbent LECs and CMRS 
Providers
    727. Section 20.11 of our rules, which predates enactment of the 
1996 Act, requires that interconnection agreements between incumbent 
LECs and CMRS providers comply with principles of mutual compensation, 
and that each carrier pay reasonable compensation for transport and 
termination of the other carrier's calls. Based on the extensive record 
in the LEC-CMRS Interconnection proceeding, as well as that in this 
proceeding, we conclude that, in many cases, incumbent LECs appear to 
have imposed arrangements that provide little or no compensation for 
calls terminated on wireless networks, and in some cases imposed 
charges for traffic originated on CMRS providers' networks, both in 
violation of section 20.11 of our rules. Accordingly, we conclude that 
CMRS providers that are party to pre-existing agreements with incumbent 
LECs that provide for non-mutual compensation have the option to 
renegotiate these agreements with no termination liabilities or other 
contract penalties. Pending the successful completion of negotiations 
or arbitration, symmetrical reciprocal compensation provisions shall 
apply, with the transport and termination rate that the incumbent LEC 
charges the CMRS provider from the pre-existing agreement applying to 
both carriers, as of the effective date of the rules we adopt pursuant 
to this order.
    728. In addition, we conclude that this opportunity for CMRS 
providers currently operating under arrangements with non-mutual 
transport and termination rates to renegotiate such arrangements 
advances the mutual compensation regime contemplated under section 
251(b)(5) of the 1996 Act. We use the term ``reciprocal compensation'' 
and ``mutual compensation'' synonymously to mean that compensation 
flows in both directions between interconnecting networks. LEC-CMRS 
Interconnection NPRM. We find that extending the opportunity to 
establish symmetrical reciprocal compensation for the transport and 
termination of traffic addresses inequalities in bargaining power that 
incumbent LECs may use to disadvantage interconnecting wireless 
carriers. At the same time, our rule will place wireless carriers with 
non-mutual, existing agreements on the same footing as other new 
entrants, who will be able to negotiate more equitable interconnection 
agreements because of the rules we put in place with this Report and 
Order. We find that we have ample authority under section 4(i) of the 
1934 Act as well as section 251 of the 1996 Act, to order this remedy. 
Courts have held that ``the Commission has the power to prescribe a 
change in contract rates when it finds them to be unlawful * * * and to 
modify other provisions of private contracts when necessary to serve 
the public interest.'' Western Union Tel. Co. v. FCC, 815 F.2d 1495, 
1501 (D.C. Cir. 1987). The Commission has adopted similar ``fresh 
look'' requirements in the past. The opportunity that we are affording 
to CMRS providers in this context is consistent with similar ``fresh 
look'' requirements that we have adopted in the past. See, e.g., 
Expanded Interconnection with Local Telephone Company Facilities Report 
and Order and NPRM, 57 FR 54323 (November 18, 1992), recon., 58 FR 
48752 (September 17, 1993) (fresh look to enable customers to take 
advantage of new competitive opportunities under special access 
expanded interconnection), vacated on other grounds and remanded for 
further proceedings sub nom. Bell Atlantic Tel. Cos. v. FCC, 24 F.3d 
1441 (1994); Competition in the Interstate Interexchange Marketplace 
Memorandum Opinion and Order on Reconsideration, 57 FR 20206 (May 12, 
1992) (``fresh look'' in context of 800 bundling with interexchange 
offerings); Amendment of the Commission's Rules Relative to Allocation 
of the 849-851/894-896 MHz Bands Memorandum Opinion and Order on 
Reconsideration, 56 FR 37853 (August 9, 1991) (``fresh look'' 
requirements imposed in context of air-ground radiotelephone service as 
condition of grant of Title III license).
5. Bill and Keep
a. Background
    729. Local Competition NPRM. In the NPRM, we defined bill-and-keep 
arrangements as those in which neither of two interconnecting networks 
charges the other network for terminating traffic that originated on 
the other network. Instead, each network recovers from its own end 
users the cost of both originating traffic delivered to the other 
network and terminating traffic received from the other network. A 
bill-and-keep approach for termination of traffic does

[[Page 45586]]

not, however, preclude a positive flat-rated charge for transport of 
traffic between carriers' networks.
    730. We sought comment on what guidance we should give state 
commissions regarding the use of bill-and-keep arrangements in 
arbitrated interconnection arrangements. We sought comment on whether 
section 252(d)(2)(B)(ii) specifically authorizes states to impose bill-
and-keep arrangements in the arbitration process, at least when certain 
conditions are met. We also sought comment on whether we should 
interpret the statute as placing any limits on the circumstances in 
which states may adopt bill-and-keep arrangements. We also asked for 
comment on the meaning of the statutory description of bill-and-keep 
arrangements as ``arrangements that waive mutual recovery.'' In 
addition, we sought comment on whether there are any circumstances in 
which the statute requires states to establish bill-and-keep 
arrangements.
    731. LEC-CMRS Interconnection NPRM. In the LEC-CMRS Interconnection 
NPRM, we proposed bill and keep as an interim arrangement. LEC-CMRS 
Interconnection NPRM, 61 FR 3644 (February 1, 1996). We noted there 
that proponents have argued that bill-and-keep would be economically 
efficient if either of two conditions are met: (1) traffic flows 
between competing LECs are balanced; or (2) the per-unit cost of 
interconnection is de minimis. We, therefore, address whether interim 
bill-and-keep arrangements for LEC-CMRS traffic should be imposed.
b. Discussion
    732. As an additional option for reciprocal compensation 
arrangements for termination services, we conclude that state 
commissions may impose bill-and-keep arrangements if neither carrier 
has rebutted the presumption of symmetrical rates and if the volume of 
terminating traffic that originates on one network and terminates on 
another network is approximately equal to the volume of terminating 
traffic flowing in the opposite direction, and is expected to remain 
so, as defined below. We disagree with commenters who contend that the 
Commission and states do not have the authority to mandate bill-and-
keep arrangements under any circumstances. Section 252(d)(2)(B)(i) 
provides that the definition of what may be considered ``just and 
reasonable'' terms and conditions for reciprocal compensation ``shall 
not be construed to preclude arrangements that afford mutual recovery 
(such as bill-and-keep arrangements).'' We conclude that section 
252(d)(2) would be superfluous if bill-and-keep arrangements were 
limited to negotiated agreements, because none of the standards in 
section 252(d) apply to voluntarily-negotiated agreements. Therefore, 
it is clear that bill-and-keep arrangements may be imposed in the 
context of the arbitration process for termination of traffic, at least 
in some circumstances.
    733. Section 252(d)(2)(A)(i) provides that to be just and 
reasonable, reciprocal compensation must ``provide for the mutual and 
reciprocal recovery by each carrier of costs associated with transport 
and termination.'' In general, we find that carriers incur costs in 
terminating traffic that are not de minimis, and consequently, bill-
and-keep arrangements that lack any provisions for compensation do not 
provide for recovery of costs. In addition, as long as the cost of 
terminating traffic is positive, bill-and-keep arrangements are not 
economically efficient because they distort carriers' incentives, 
encouraging them to overuse competing carriers' termination facilities 
by seeking customers that primarily originate traffic. On the other 
hand, when states impose symmetrical rates for the termination of 
traffic, payments from one carrier to the other can be expected to be 
offset by payments in the opposite direction when traffic from one 
network to the other is approximately balanced with the traffic flowing 
in the opposite direction. In such circumstances, bill-and-keep 
arrangements may minimize administrative burdens and transaction costs. 
We find that, in certain circumstances, the advantages of bill-and-keep 
arrangements outweigh the disadvantages, but no party has convincingly 
explained why, in such circumstances, parties themselves would not 
agree to bill-and-keep arrangements. We are mindful, however, that 
negotiations may fail for a variety of reasons. We conclude, therefore, 
that states may impose bill-and-keep arrangements if traffic is roughly 
balanced in the two directions and neither carrier has rebutted the 
presumption of symmetrical rates.
    734. We further conclude that states may adopt specific thresholds 
for determining when traffic is roughly balanced. If state commissions 
impose bill-and-keep arrangements, those arrangements must either 
include provisions that impose compensation obligations if traffic 
becomes significantly out of balance or permit any party to request 
that the state commission impose such compensation obligations based on 
a showing that the traffic flows are inconsistent with the threshold 
adopted by the state. For example, the Michigan Commission adopted a 
five percent threshold for the difference between the traffic flows in 
the two directions. States may, however, also apply a general 
presumption that traffic between carriers is balanced and is likely to 
remain so. In that case, a party asserting imbalanced traffic 
arrangements must prove to the state commission that such imbalance 
exists. Under such a presumption, bill-and-keep arrangements would be 
justified unless a carrier seeking to rebut this presumption satisfies 
its burden of proof. We also find that states that have adopted bill-
and-keep arrangements prior to the date that this order becomes 
effective, either in arbitration or rulemaking proceedings, may retain 
such arrangements, unless a party proves to the state commission that 
traffic is not roughly balanced. In that case, the state commission is 
to determine the transport and termination rates based either on the 
forward-looking economic cost-based methodology or consistent with the 
default proxies in this order. Finally, we observe that carriers have 
an incentive to agree to bill-and-keep arrangements if it is 
economically efficient to do so, and that nothing in the Act prevents 
parties from agreeing to bill-and-keep arrangements even if a state 
declines to mandate such arrangements. For example, we note that Time 
Warner/BellSouth interconnection agreement provides for a bill-and-keep 
arrangement based on a ``roughly balanced traffic'' concept.
    735. In determining whether traffic is balanced, we find that 
precise traffic measurement is not necessary. It is sufficient to use 
approximations based on samples and studies comparable to reports on 
percentages of interstate use often used for access charge billing. 
Such an approach is likely to reduce implementation costs and 
complexities. Alternatively, state commissions may require that traffic 
flowing in the two directions be measured as accurately as possible 
during some defined period of time, which may commence no later than 
six months after an interconnection arrangement goes into effect. All 
affected carriers are required to cooperate with the state commission 
in implementing this measurement. A state commission that adopts a 
traffic flow measurement approach may adopt a ``true-up'' mechanism to 
ensure that no carrier is disadvantaged by an interim rate that differs 
from the rate established once such a measurement is undertaken. 
Finally, state commissions may require that local traffic and access 
traffic be carried on separate trunk groups if they deem such measures 
to be necessary to

[[Page 45587]]

ensure accurate measurement and billing.
    736. We have considered the economic impact of our rules in this 
section on small incumbent LECs. For example, RTC argues that bill-and-
keep arrangements fail to adequately deal with each carrier's costs. In 
addition to basing reciprocal compensation on the incumbent LECs costs, 
we believe that by allowing carriers to rebut a presumption of balanced 
traffic volumes, the concern that bill-and-keep arrangements fail to 
adequately deal with each carrier's costs are addressed. We also note 
that certain small incumbent LECs are not subject to our rules under 
section 251(f)(1) of the 1996 Act, unless otherwise determined by a 
state commission, and certain other small incumbent LECs may seek 
relief from their state commissions from our rules under section 
251(f)(2) of the 1996 Act.
    737. We disagree with commenters that argue that mandating bill-
and-keep arrangements in these circumstances violates the taking clause 
of Fifth Amendment. We reject BellSouth's argument that mandating bill-
and-keep mechanisms would constitute a physical intrusion of LEC 
property. As NCTA observes, bill-and-keep arrangements are not a 
``physical occupation'' of incumbent LEC property and thus per se 
takings cases are irrelevant. See Loretto v. Telepromter Manhattan CATV 
Corp., 458 U.S. 419, 426 (1982); Lucas v. South Carolina Coastal 
Council, 112 S.Ct. 2886, 2893 (1992). We also reject arguments that the 
bill-and-keep arrangements we adopt here would not adequately 
compensate incumbent LECs for transport and termination. As Congress 
recognized, bill-and-keep arrangements allow each carrier compensation 
``in-kind'' in the form of access to the other carrier's network. 
Therefore, the type of bill-and-keep arrangements that we have 
permitted states to adopt are not unconstitutionally confiscatory.
    738. Commenters in the LEC-CMRS Interconnection NPRM assert that 
the estimated per minute cost of LEC termination ranges from 0.2 to 1.3 
cents, and most of the estimates are clustered near the lower end of 
this range. These estimates are based primarily on interconnection at a 
LEC end office, while most interconnections occur at tandem offices 
where LECs' costs of call completion are higher than terminations 
routed directly through the end office switch. Moreover, the record 
contains no estimates of the cost of CMRS termination. That cost is 
generally considered to be greater than the cost of LEC termination; 
but only one oral, ex parte estimate of CMRS cost has been offered: 
2.25 to 4.0 cents per minute. Further, there is no showing that the 
transaction costs of measuring traffic flows and making net payments 
would be so high that a bill-and-keep regime would be more efficient. 
Moreover, no party has demonstrated that aggregate cost flows between 
interconnecting LECs and CMRS providers are in balance.
    739. In light of the overall transport and termination policy we 
are adopting, we do not adopt the interim bill and keep arrangement 
tentatively proposed in the LEC-CMRS Interconnection NPRM. 
Notwithstanding our conclusions about bill and keep above, under which 
states may rule on bill and keep for particular pairs of firms based on 
the circumstances prevailing between them, we conclude that we are 
correct in not adopting bill and keep as a single, nationwide policy 
that would govern all LEC-CMRS transport and termination of traffic. 
Thus, we reject our tentative conclusion in the LEC-CMRS 
Interconnection NPRM. We expect, however, that when it is economically 
efficient to do so, parties will adopt bill and keep arrangements in 
the negotiation process. Also, as described above, a state commission 
may impose bill-and-keep arrangements with respect to CMRS-LEC traffic 
when it finds that traffic is roughly balanced and is expected to 
remain so.

B. Access to Rights of Way

1. Overview
    740. Section 251(b)(4) imposes upon each LEC the ``duty to afford 
access to the poles, ducts, conduits, and rights-of-way of such carrier 
to competing providers of telecommunications services on rates, terms, 
and conditions that are consistent with section 224.'' The access 
provisions of section 224, as amended by the 1996 Act, differ from the 
requirements of section 251(b)(4) with respect to both the entities 
required to grant access and the entities that may demand access. 
Section 224(f)(1) imposes upon all utilities, including LECs, the duty 
to ``provide a cable television system or any telecommunications 
carrier with nondiscriminatory access to any pole, duct, conduit, or 
right-of-way owned or controlled by it.'' For purposes of section 224, 
the term ``telecommunications carrier'' excludes any incumbent LEC as 
that term is defined in section 251(h).
    741. In the NPRM, we sought comment on various aspects of this 
access requirement, as well as on section 224(f)(2) which creates the 
following limited exception to the obligations of section 224(f)(1):

    Notwithstanding paragraph (1), a utility providing electric 
service may deny a cable television system or any telecommunications 
carrier access to its poles, ducts, conduits, or rights-of-way, on a 
non-discriminatory basis where there is insufficient capacity and 
for reasons of safety, reliability and generally applicable 
engineering purposes.

    742. Additionally, we sought comment on section 224(h), which 
provides:

    Whenever the owner of a pole, duct, conduit, or right-of-way 
intends to modify or alter such pole, duct, conduit, or right-of-
way, the owner shall provide written notification of such action to 
any entity that has obtained an attachment to such conduit or right-
of-way so that such entity may have a reasonable opportunity to add 
to or modify its existing attachment. Any entity that adds to or 
modifies its existing attachment after receiving such notification 
shall bear a proportionate share of the costs incurred by the owner 
in making such pole, duct, conduit, or right-of-way accessible.

    743. In this Order, we establish rules implementing these 
provisions. Based on the comments received and the plain language of 
the statute, and in furtherance of our original mandate to institute an 
expeditious procedure for determining just and reasonable pole 
attachment rates with a minimum of administrative costs and consistent 
with fair and efficient regulation, we adopt herein a program for 
nondiscriminatory access to poles, ducts, conduits and rights-of-way. 
This Order includes several specific rules as well as a number of more 
general guidelines that are designed to give parties flexibility to 
reach agreements on access to utility-controlled poles, ducts, 
conduits, and rights-of-way, without the need for regulatory 
intervention. We provide for expedited dispute resolution when good 
faith negotiations fail, and we establish requirements concerning 
modifications to pole attachments and the allocation of the cost of 
such modifications. We also explain the division of responsibility 
between federal and state regulation envisioned by the 1996 Act.
2. Section 224(f): Non-Discriminatory Access
a. Background
    744. Pursuant to section 224(f)(1), a utility must grant 
telecommunications carriers and cable operators nondiscriminatory 
access to all poles, ducts, conduits, and rights-of-way owned or 
controlled by the utility. This directive seeks to ensure that no party 
can use its control of the enumerated facilities and property to 
impede, inadvertently or otherwise, the

[[Page 45588]]

installation and maintenance of telecommunications and cable equipment 
by those seeking to compete in those fields. Section 224(f)(1) appears 
to mandate access every time a telecommunications carrier or cable 
operator seeks access to the utility facilities or property identified 
in that section, with a limited exception allowing electric utilities 
to deny access ``where there is insufficient capacity and for reasons 
of safety, reliability and generally applicable engineering purposes.'' 
While Congress recognized the legitimate interests of utilities in 
protecting and promoting the safety and reliability of their core 
services, on balance we believe section 224(f) reflects Congress' 
determination that utilities generally must accommodate requests for 
access by telecommunications carriers and cable operators.
b. Discussion
(1) Generally
    745. We conclude that the reasonableness of particular conditions 
of access imposed by a utility should be resolved on a case-specific 
basis. We discuss below the forum for such resolutions. The record 
makes clear that there are simply too many variables to permit any 
other approach with respect to access to the millions of utility poles 
and untold miles of conduit in the nation. The broader access mandated 
by the Act, in conjunction with the reasonableness variables mentioned 
here, will likely increase the number of disputes over access. In turn, 
this may cause small incumbent LECs and small entities to incur the 
need for additional resources to evaluate, process, and resolve such 
disputes, as well as to make poles and conduits physically accessible. 
We will not enumerate a comprehensive regime of specific rules, but 
instead establish a few rules supplemented by certain guidelines and 
presumptions that we believe will facilitate the negotiation and mutual 
performance of fair, pro-competitive access agreements. We will monitor 
the effect of this approach and propose more specific rules at a later 
date if reasonably necessary to facilitate access and the development 
of competition in telecommunications and cable services. We believe 
that the rules, guidelines and presumptions established herein strike 
the appropriate balance between the need for uniformity, on the one 
hand, and the need for flexibility, on the other, which should minimize 
the regulatory burdens and economic impact for both small entities and 
small incumbent LECs.
    746. We also address the impact on small incumbent LECs. For 
example, the Rural Telephone Coalition opposes adoption of sweeping 
national rules because local circumstances will be relevant to disputes 
over access to poles or rights-of-way. We have considered the economic 
impact of our rules in this section on small incumbent LECs. For 
example, we have adopted a flexible regulatory approach to pole 
attachment disputes that ensures consideration of local conditions and 
circumstances.
    747. Our determination not to prescribe numerous specific rules is 
supported by acknowledgements in the relevant national industry codes 
that no single set of rules can take into account all of the issues 
that can arise in the context of a single installation or attachment. 
The NESC, one of the national codes that virtually all commenters 
regard as containing reasonable attachment requirements, contains 
thousands of rules and dozens of tables and figures, all designed to 
ensure ``the practical safeguarding of persons during the installation, 
operation, or maintenance of electric supply and communication lines 
and associated equipment.''
    748. For example, with respect to overhead wires, the NESC contains 
64 pages of rules dictating minimum ``clearances,'' i.e., the minimum 
separations between a particular wire, cable, or other piece of 
equipment and other wires, cables, equipment, structures, and property. 
A short list of only a few of the variables in that discussion 
includes: the type of wire or equipment in question; the type of 
current being transmitted; the nature of the structure supporting the 
wires; the proximity and nature of other equipment and structures; the 
temperature of the conducting element; and the use of the land below 
the wires. These separation requirements dictate the required distances 
between various wires and other transmission and distribution 
equipment, as well as distances between such equipment and other 
objects that are not a part of the transmission and distribution 
network. Prescribed separations between wires will vary between the 
point at which wires are attached to a pole and at mid-points between 
poles, with the latter separations dictated by the predicted amount of 
sag that the wires will experience. The amount of sag will itself 
depend upon additional variables. Changing just one variable can 
radically alter the separation requirements. Other rules dictate: 
electrical loading requirements that vary depending upon wind and ice 
conditions and the predicted sag of the lines being installed; 
structural strength requirements that vary depending upon the amount 
and type of installations and the nature of the supporting structure; 
and line insulation requirements. A wholly separate and equally 
extensive array of rules apply to underground lines.
    749. Despite this specificity, the introduction to the NESC states 
that the code ``is not intended as a design specification or an 
instruction manual.'' Indeed, utilities typically impose requirements 
more stringent than those prescribed by NESC and other industry codes. 
In some cases stricter requirements and restrictions are dictated by 
federal, state, or local law. Potentially applicable federal 
regulations include rules promulgated by the Federal Energy Regulatory 
Commission (``FERC'') and by the Occupational Safety and Health 
Administration (``OSHA''). Various restrictions can apply at the state 
level as well. Some local requirements governing zoning, aesthetics, or 
road clearances impose more stringent or more specific requirements 
than those of the national industry codes or of federal or state law.
    750. In addition to operating under federal, state, and local 
requirements, a utility normally will have its own operating standards 
that dictate conditions of access. Utilities have developed their own 
individual standards and incorporated them into pole attachment 
agreements because industry-wide standards and applicable legal 
requirements are too general to take into account all of the variables 
that can arise. A utility's individual standards cover not simply its 
policy with respect to attachments, but all aspects of its business. 
Standards vary between companies and across different regions of the 
country based on the experiences of each utility and on local 
conditions. As Duquesne notes, the provision of electricity is the 
result of varied engineering factors that continue to evolve. Because 
there is no fixed manner in which to provide electricity, there is no 
way to develop an exhaustive list of specific safety and reliability 
standards. In addition, increasing competition in the provision of 
electricity is forcing electric utilities to engineer their systems 
more precisely, in a way that is tailored to meet the specific needs of 
the electric company and its customers. As a result, each utility has 
developed its own internal operating standards to suit its individual 
needs and experiences.
    751. The record contains numerous factors that may vary from region 
to region, necessitating different operating

[[Page 45589]]

procedures particularly with respect to attachments. Extreme 
temperatures, ice and snow accumulation, wind, and other weather 
conditions all affect a utility's safety and engineering practices. In 
some instances, machinery used by local industries requires higher than 
normal clearances. Particular utility work methods and equipment may 
require specific separations between attachments and may restrict the 
height of the poles that a utility will use. The installation and 
maintenance of underground facilities raise distinct safety and 
reliability concerns. It is important that such variables be taken into 
account when drafting pole attachment agreements and considering an 
individual attachment request. The number of variables makes it 
impossible to identify and account for them all for purposes of 
prescribing uniform standards and requirements. Universally accepted 
codes such as the NESC do not attempt to prescribe specific 
requirements applicable to each attachment request and neither shall 
we.
    752. We are sensitive to concerns of cable operators and 
telecommunications carriers regarding utility-imposed restrictions that 
could be used unreasonably to prevent access. We note in particular 
that a utility that itself is engaged in video programming or 
telecommunications services has the ability and the incentive to use 
its control over distribution facilities to its own competitive 
advantage. A number of utilities have obtained, or are seeking, the 
right and ability to provide telecommunications or video programming 
services. We agree, however, with Duquesne that the best safeguard is 
not the adoption of a comprehensive set of substantive engineering 
standards, but the establishment of procedures that will require 
utilities to justify any conditions they place on access. These 
procedures are outlined in section E below. In the next two sections, 
we set forth rules of general applicability and broader guidelines 
relating to specific issues that are intended to govern access 
negotiations between the parties.
(2) Specific Rules
    753. We establish five rules of general applicability. First, in 
evaluating a request for access, a utility may continue to rely on such 
codes as the NESC to prescribe standards with respect to capacity, 
safety, reliability, and general engineering principles. We have no 
reason to question the reasonableness of the virtually unanimous 
judgment of the commenters, many of whom have otherwise diverse and 
conflicting interests, in this regard. Utilities may incorporate such 
standards into their pole attachment agreements in accordance with 
section 224(f)(2). Other industry codes also will be presumed 
reasonable if shown to be widely-accepted objective guides for the 
installation and maintenance of electrical and communications 
facilities.
    754. Second, federal requirements, such as those imposed by FERC 
and OSHA, will continue to apply to utilities to the extent such 
requirements affect requests for attachments to utility facilities 
under section 224(f)(1). We see no reason to supplant or modify 
applicable federal regulations promulgated by FERC, OSHA, or other 
federal agencies acting in accordance with their lawful authority.
    755. Third, we will consider state and local requirements affecting 
pole attachments. We note that section 224(c)(1) provides:

    Nothing in this section shall be construed to apply to, or to 
give the Commission jurisdiction with respect to rates, terms and 
conditions, or access to poles, ducts, conduits, and rights-of-way 
as provided in subsection (f), for pole attachments in any case 
where such matters are regulated by the State.

    756. In a separate section we discuss the authority of a state to 
preempt federal regulation of pole attachments. For present purposes, 
we conclude that state and local requirements affecting attachments are 
entitled to deference even if the state has not sought to preempt 
federal regulations under section 224(c). The 1996 Act increased 
significantly the Commission's role with respect to attachments by 
creating federal access rights and obligations, which for decades had 
been the subject of state and local regulation. Such regulations often 
relate to matters of local concern that are within the knowledge of 
local authorities and are not addressed by standard codes such as the 
NESC. We do not believe that regulations of this sort necessarily 
conflict with the scheme established in this Order. More specifically, 
we see nothing in the statute or in the record that compels us to 
preempt such local regulations as a matter of course. Regulated 
entities and other interested parties are familiar with existing state 
and local requirements and have adopted operating procedures and 
practices in reliance on those requirements. We believe it would be 
unduly disruptive to invalidate summarily all such local requirements. 
We thus agree with commenters who suggest that such state and local 
requirements should be presumed reasonable. Thus, even where a state 
has not asserted preemptive authority in accordance with section 
224(c), state and local requirements affecting pole attachments remain 
applicable, unless a complainant can show a direct conflict with 
federal policy. Where a local requirement directly conflicts with a 
rule or guideline we adopt herein, our rules will prevail. We note that 
a standard prescribed by the NESC is not a specific Commission rule, 
and therefore a state requirement that is more restrictive than the 
corresponding NESC standard may still apply.
    757. It is important to note that the discretion of state and local 
authorities to regulate in the area of pole attachments is tempered by 
section 253, which invalidates all state or local legal requirements 
that ``prohibit or have the effect of prohibiting the ability of any 
entity to provide any interstate or intrastate telecommunications 
service.'' This restriction does not prohibit a state from imposing 
``on a competitively neutral basis and consistent with section 254, 
requirements necessary to preserve and advance universal service, 
protect the public safety and welfare, ensure the continued quality of 
telecommunications services, and safeguard the rights of consumers.'' 
In addition, section 253 specifically recognizes the authority of state 
and local governments to manage public rights-of-way and to require 
fair and reasonable compensation for the use of such rights-of-way.
    758. Fourth, where access is mandated, the rates, terms, and 
conditions of access must be uniformly applied to all 
telecommunications carriers and cable operators that have or seek 
access. Except as specifically provided herein, the utility must charge 
all parties an attachment rate that does not exceed the maximum amount 
permitted by the formula we have devised for such use, and that we will 
revise from time to time as necessary. Other terms and conditions also 
must be applied on a nondiscriminatory basis.
    759. Fifth, except as specifically noted below, a utility may not 
favor itself over other parties with respect to the provision of 
telecommunications or video programming services. We interpret the 
statutory requirement of nondiscriminatory access as compelling this 
result, particularly when read in the context of other provisions of 
the statute. This element of nondiscrimination is evident in section 
224(g), which requires a utility to impute to itself or to its 
affiliate the pole attachment rate such entity would be charged were it 
a non-affiliated entity. Further, we believe it unlikely that Congress 
intended to allow an

[[Page 45590]]

incumbent LEC to favor itself over its competitors with respect to 
attachments to the incumbent LEC's facilities, given that section 
224(a)(5) has just the opposite effect in that it operates to preclude 
the incumbent LEC from obtaining access to the facilities of other 
LECs. A utility will be able to discriminate in favor of itself with 
respect to the provision of telecommunications or cable services only 
as expressly provided herein.
    760. Aside from the conditions described above, we will not adopt 
specific rules to determine when access may be denied because of 
capacity, safety, reliability, or engineering concerns. In addition, we 
reject the contention of some utilities that they are the primary 
arbiters of such concerns, or that their determinations should be 
presumed reasonable. We recognize that the public welfare depends upon 
safe and reliable provision of utility services, yet we also note that 
the 1996 Act reinforces the vital role of telecommunications and cable 
services. As noted above, section 224(f)(1) in particular reflects 
Congress' intention that utilities must be prepared to accommodate 
requests for attachments by telecommunications carriers and cable 
operators.
(3) Guidelines Governing Certain Issues
    761. In addition to the rules articulated above, we will establish 
guidelines concerning particular issues that have been raised in this 
proceeding. These guidelines are intended to provide general ground 
rules upon which we expect the parties to be able to implement pro-
competitive attachment polices and procedures through arms-length 
negotiations, rather than having to rely on multiple adjudications by 
the Commission in response to complaints or by other forums. We do not 
discuss herein every issue raised in the comments. Rather, we discuss 
only major issues that we believe will arise often. Issues not 
discussed herein may be important in a particular case, but are not 
susceptible to any general observation or presumption.
    762. We note that a utility's obligation to permit access under 
section 224(f) does not depend upon the execution of a formal written 
attachment agreement with the party seeking access. We understand that 
such agreements are the norm and encourage their continued use, subject 
to the requirements of section 224. Complaint or arbitration procedures 
will, of course, be available when parties are unable to negotiate 
agreements.
(a) Capacity Expansions
    763. When a utility cannot accommodate a request for access because 
the facility in question has no available space, it often must modify 
the facility to increase its capacity. In some cases, a request for 
access can be accommodated by rearranging existing facilities to make 
room for a new attachment. Another method of maximizing useable 
capacity is to permit ``overlashing,'' by which a new cable is wrapped 
around an existing wire, rather than being strung separately. A utility 
pole filled to capacity often can be replaced with a taller pole. New 
underground installations can be accommodated by the installation of 
new duct, including subducts that divide a standard duct into four 
separate, smaller ducts. Cable companies and others contend that there 
is rarely a lack of capacity given the availability of taller poles and 
additional conduits. These commenters suggest that utilities should 
rarely be permitted to deny access on the basis of a lack of capacity, 
particularly since under section 224(h) the party or parties seeking to 
increase capacity will be responsible for all associated costs. 
Utilities argue that neither the statute nor its legislative history 
requires facility owners to expand or alter their facilities to 
accommodate entities seeking to lease space. These commenters argue 
that, if Congress intended such a result, the statute would have 
imposed the requirement explicitly.
    764. A utility is able to take the steps necessary to expand 
capacity if its own needs require such expansion. The principle of 
nondiscrimination established by section 224(f)(1) requires that it do 
likewise for telecommunications carriers and cable operators. In 
addition, we note that section 224(f)(1) mandates access not only to 
physical utility facilities (i.e., poles, ducts, and conduit), but also 
to the rights-of-way held by the utility. The lack of capacity on a 
particular facility does not necessarily mean there is no capacity in 
the underlying right-of-way that the utility controls. For these 
reasons, we agree with commenters who argue that a lack of capacity on 
a particular facility does not automatically entitle a utility to deny 
a request for access. Since the modification costs will be borne only 
by the parties directly benefitting from the modification, neither the 
utility nor its ratepayers will be harmed, despite the assertions of 
utilities to the contrary.
    765. In some cases, however, increasing capacity involves more than 
rearranging existing attachments or installing a new pole or duct. For 
example, the record suggests that utility poles of 35 and 40 feet in 
height are relatively standard, but that taller poles may not always be 
readily available. The transportation, installation, and maintenance of 
taller poles can entail different and more costly practices. Many 
utilities have trucks and other service equipment designed to maintain 
poles of up to 45 feet, but no higher. Installing a 50 foot pole may 
require the utility to invest in new and costly service equipment. 
Expansion of underground conduit space entails a very complicated 
procedure, given the heightened safety and reliability concerns 
associated with such facilities. Local regulators may seek to restrict 
the frequency of underground excavations. We find it inadvisable to 
attempt to craft a specific rule that prescribes the circumstances in 
which, on the one hand, a utility must replace or expand an existing 
facility in response to a request for access and, on the other hand, it 
is reasonable for the utility to deny the request due to the 
difficulties involved in honoring the request. We interpret sections 
224 (f)(1) and (f)(2) to require utilities to take all reasonable steps 
to accommodate requests for access in these situations. Before denying 
access based on a lack of capacity, a utility must explore potential 
accommodations in good faith with the party seeking access.
    766. We will not require telecommunications providers or cable 
operators seeking access to exhaust any possibility of leasing capacity 
from other providers, such as through a resale agreement, before 
requesting a modification to expand capacity. As indicated elsewhere in 
this Order, resale will play an important role in the development of 
competition in telecommunications. However, as we also have noted, 
there are benefits to facilities-based competition as well. We do not 
wish to discourage unduly the latter form of competition solely because 
the former might better suit the preferences of incumbent utilities 
with respect to pole attachments.
(b) Reservation of Space by Utility
    767. Utilities routinely reserve space on their facilities to meet 
future needs. Local economic growth and property development may 
require an electric utility to install additional lines or transformers 
that use previously available space on the pole. A utility may install 
an underground duct in which it can later install additional 
distribution lines, if necessitated by a subsequent increase in demand 
or by

[[Page 45591]]

damage to the original lines. Reserving space allows the utility to 
respond quickly and efficiently to changed circumstances. This 
practice, however, also can result in a utility denying access to a 
telecommunications carrier or a cable operator even though there is 
unused capacity on the pole or duct.
    768. This issue is of particular concern because section 224(h) 
imposes the cost of modifying attachments on those parties that benefit 
from the modification. If, for example, a cable operator seeks to make 
an attachment on a facility that has no available capacity, the 
operator would bear the full cost of modifying the facility to create 
new capacity, such as by replacing an existing pole with a taller pole. 
Other parties with attachments would not share in the cost, unless they 
expanded their own use of the facilities at the same time. If the 
electric utility decides to change a pole for its own benefit, and no 
other parties derive a benefit from the modification, then the electric 
company would bear the full cost of the new pole.
    769. Some commenters contend that utilities will reserve space on a 
pole and then claim there is no capacity available, as a way of forcing 
cable operators and telecommunications carriers to pay for new utility 
facilities. These commenters contend that we should restrict or 
eliminate the authority of utilities to reserve space. Utilities 
respond that it is unfair to force a utility to accommodate full 
occupation of its facility by third parties and then to saddle the 
utility with the cost of modifying the facility when the utility's own 
needs change and require a costly increase in capacity.
    770. The near-universal public demand for their core utility 
services, while imposing certain obligations, arguably entitles 
utilities to certain prerogatives vis-a-vis other parties, including 
the right to reserve capacity to meet anticipated future demand for 
those utility services. Recognition of such a right, however, could 
conflict with the nondiscrimination requirement of section 224(f)(1) 
which prohibits a utility from favoring itself or its affiliates with 
respect to the provision of telecommunications and video services. In 
addition, allowing space to go unused when a cable operator or 
telecommunications carrier could make use of it is directly contrary to 
the goals of Congress.
    771. Balancing these concerns leads us to the following 
conclusions. We will permit an electric utility to reserve space if 
such reservation is consistent with a bona fide development plan that 
reasonably and specifically projects a need for that space in the 
provision of its core utility service. The electric utility must permit 
use of its reserved space by cable operators and telecommunication 
carriers until such time as the utility has an actual need for that 
space. At that time, the utility may recover the reserved space for its 
own use. The utility shall give the displaced cable operator or 
telecommunications carrier the opportunity to pay for the cost of any 
modifications needed to expand capacity and to continue to maintain its 
attachment. An electric utility may not reserve or recover reserved 
space to provide telecommunications or video programming service and 
then force a previous attaching party to incur the cost of modifying 
the facility to increase capacity, even if the reservation of space 
were pursuant to a reasonable development plan. The record does not 
contain sufficient data for us to establish a presumptively reasonable 
amount of pole or conduit space subject that an electric utility may 
reserve. If parties cannot agree, disputes will be resolved on a case-
by-case approach based on the reasonableness of the utility's forecast 
of its future needs and any additional information that is relevant 
under the circumstances.
    772. With respect to a utility providing telecommunications or 
video services, we believe the statute requires a different result. 
Section 224(f)(1) requires nondiscriminatory treatment of all providers 
of such services and does not contain an exception for the benefit of 
such a provider on account of its ownership or control of the facility 
or right-of-way. Congress seemed to perceive such ownership and control 
as a threat to the development of competition in these areas, thus 
leading to the enactment of the provision in question. Allowing the 
pole or conduit owner to favor itself or its affiliate with respect to 
the provision of telecommunications or video services would nullify, to 
a great extent, the nondiscrimination that Congress required. 
Permitting an incumbent LEC, for example, to reserve space for local 
exchange service, to the detriment of a would-be entrant into the local 
exchange business, would favor the future needs of the incumbent LEC 
over the current needs of the new LEC. Section 224(f)(1) prohibits such 
discrimination among telecommunications carriers. As indicated above, 
this prohibition does not apply when an electric utility asserts a 
future need for capacity for electric service, to the detriment of a 
telecommunications carrier's needs, since the statute does not require 
nondiscriminatory treatment of all utilities; rather, it requires 
nondiscriminatory treatment of all telecommunications and video 
providers.
(c) Definition of ``Utility''
    773. The access obligations of section 224(f) apply to any 
``utility,'' which is defined as:

any person who is a local exchange carrier or an electric, gas, 
water, steam, or other public utility, and who owns or controls 
poles, ducts, conduits, or other rights-of-way used, in whole or in 
part, for any wire communications. Such term does not include any 
railroad, any person who is cooperatively organized, or any person 
owned by the Federal Government or any State.

    774. Arguably a provider of utility service does not fall within 
this definition if it has refused to permit any wired communications 
use of its facilities and rights-of-way since, in that case, its 
facilities and rights-of-way are not ``used, in whole or in part, for 
wire communications.'' Under this construction, an electric utility 
would have no obligation to grant access under section 224(f) until the 
utility voluntarily has granted access to one communications provider 
or has used its facilities for wire communications. Only after its 
facilities were being used for wire communications would the utility 
have to grant access to all telecommunications carriers and cable 
operators on a nondiscriminatory basis.
    775. We conclude that this construction of the statute is mandated 
by its plain language and is indeed nondiscriminatory, since denial of 
access to all discriminates against none. We see no statutory basis, 
however, for the argument made by some utilities that they should be 
permitted to devote a portion of their poles, ducts, conduits, and 
rights-of-way to wire communications without subjecting all such 
property to the access obligations of section 224(f)(1). Those 
obligations apply to any ``utility,'' which section 224(a)(1) defines 
to include an entity that controls ``poles, ducts, conduits, or rights-
of-way used, in whole or in part, for any wire communications.'' The 
use of the phrase ``in whole or in part'' demonstrates that Congress 
did not intend for a utility to be able to restrict access to the exact 
path used by the utility for wire communications. We further conclude 
that use of any utility pole, duct, conduit, or right-of-way for wire 
communications triggers access to all poles, ducts, conduits, and 
rights-of-way owned or controlled by the utility, including those not 
currently used for wire communications.

[[Page 45592]]

    776. We reject the contention that, because an electric utility's 
internal communications do not pose a competitive threat to third party 
cable operators or telecommunications carriers, such internal 
communications are not ``wire communications'' and do not trigger 
access obligations. Although internal communications are used solely to 
promote the efficient distribution of electricity, the definition of 
``wire communication'' is broad and clearly encompasses an electric 
utility's internal communications.
(d) Application of Section 224(f)(2) to Non-Electric Utilities
    777. While all utilities are subject to the access obligations of 
section 224(f)(1), the provisions of section 224(f)(2), permitting a 
utility to deny access due to a lack of capacity or for reasons of 
safety, reliability, and generally applicable engineering purposes, 
apply only to ``a utility providing electric service * * *.'' Based on 
this statutory language, some commenters suggest that LECs and other 
utilities that do not provide electric service must grant requests for 
access, regardless of any concerns relating to safety, reliability, and 
general engineering principles. If there is a lack of capacity, a LEC 
must create more capacity, according to these commenters.
    778. While the express language of sections 224 (f)(1) and (f)(2) 
suggests that only utilities providing electric service can take into 
consideration concerns relating to safety and reliability, we are 
reluctant to ignore these concerns simply because the pole owner is not 
an electric utility. Even parties seeking broad access rights under 
section 224 recognize that, in some circumstances, a LEC will have 
legitimate safety or engineering concerns that may need to be 
accommodated. We believe that Congress could not have intended for a 
telecommunications carrier to ignore safety concerns when making pole 
attachment decisions. Rather than reach this dangerous result which 
would require us to ignore the dictates of sections 1 and 4(o) of the 
Communications Act, we conclude that any utility may take into account 
issues of capacity, safety, reliability and engineering when 
considering attachment requests, provided the assessment of such 
factors is done in a nondiscriminatory manner.
    779. Nevertheless, we believe that section 224(f)(2) reflected 
Congress' acknowledgment that issues involving capacity, safety, 
reliability and engineering raise heightened concerns when electricity 
is involved, because electricity is inherently more dangerous than 
telecommunications services. Accordingly, although we determine that it 
is proper for non-electric utilities to raise these matters, they will 
be scrutinized very carefully, particularly when the parties concerned 
have a competitive relationship.
(e) Third-Party Property Owners
    780. Section 224(f)(1) mandates that the utility grant access to 
any pole, duct, conduit, or right-of-way that is ``owned or controlled 
by it.'' Some utilities and LECs argue that certain private easement 
agreements, when interpreted under the applicable state property laws, 
deprive the utilities of the ownership or control that triggers their 
obligation to accommodate a request for access. Moreover, they contend, 
access to public rights-of-way may be restricted by state law or local 
ordinances. Opposing commenters contend that the addition of cable 
television or telecommunications facilities is compatible with electric 
service and therefore does not violate easements that have been granted 
for the provision of electric service. These commenters also assert 
that the statute does not draw specific distinctions between private 
and public easements. Further, some cable operators contend that 
utility easements are accessible to cable operators pursuant to section 
621(a)(2) of the Communications Act as long as the easements are 
physically compatible with such use, regardless of the terms of a 
written easement agreement. Another commenter suggests utilities are 
best positioned to determine when access requests would affect a 
private easement, foreclosing the need to determine whether a private 
owner would consent to the requested attachment. As for local 
ordinances restricting access to public rights-of-way, one commenter 
suggests that such restrictions would violate section 253(a) of the 
Act, which blocks state or local rules that prohibit competition.
    781. The scope of a utility's ownership or control of an easement 
or right-of-way is a matter of state law. We cannot structure general 
access requirements where the resolution of conflicting claims as to a 
utility's control or ownership depends upon variables that cannot now 
be ascertained. We reiterate that the access obligations of section 
224(f) apply when, as a matter of state law, the utility owns or 
controls the right-of-way to the extent necessary to permit such 
access.
    782. Section 621(a)(2) states that a cable franchise shall be 
construed as authorizing the construction of cable facilities in public 
rights-of-way and ``through easements * * * which have been dedicated 
for compatible uses * * * .'' The scope of a cable operator's access to 
easements under this provision has been the subject of a number of 
court opinions. To the extent section 621(a)(2) has been construed to 
permit access to easements, a cable operator must be permitted to 
attach to utility poles, ducts, and conduits within such easements in 
accordance with section 224(f).
    783. Finally, we disagree with those utilities that contend that 
they should not be forced to exercise their powers of eminent domain to 
establish new rights-of-way for the benefit of third parties. We 
believe a utility should be expected to exercise its eminent domain 
authority to expand an existing right-of-way over private property in 
order to accommodate a request for access, just as it would be required 
to modify its poles or conduits to permit attachments. Congress seems 
to have contemplated an exercise of eminent domain authority in such 
cases when it made provisions for an owner of a right-of-way that 
``intends to modify or alter such * * * right-of-way * * * .''
(f) Other Matters
    784. Utilities stress the importance of ensuring that only 
qualified workers be permitted in the proximity of utility facilities. 
Some utilities seek to limit access to their facilities to the 
utility's own specially trained employees or contractors, particularly 
with respect to underground conduits. According to these commenters, 
parties seeking to make attachments to utility facilities should be 
required to pay for the use of the utility's workers if the utility 
concludes that only its workers are fit for the job. While we agree 
that utilities should be able to require that only properly trained 
persons work in the proximity of the utilities' lines, we will not 
require parties seeking to make attachments to use the individual 
employees or contractors hired or pre-designated by the utility. A 
utility may require that individuals who will work in the proximity of 
electric lines have the same qualifications, in terms of training, as 
the utility's own workers, but the party seeking access will be able to 
use any individual workers who meet these criteria. Allowing a utility 
to dictate that only specific employees or contractors be used would 
impede the access that Congress sought to bestow on telecommunications 
providers and cable operators and would inevitably lead to disputes 
over rates to be paid to the workers.

[[Page 45593]]

    785. Some electric utilities argue that high voltage transmission 
facilities should not be accessible by telecommunications carriers or 
cable operators under section 224(f)(1). These commenters contend that 
transmission facilities, which are used for high voltage transmissions 
over great distances, are far more delicate and dangerous than local 
distribution facilities. Permitting attachments to transmission 
facilities, they argue, poses a greater risk to the safety and 
reliability of the electric distribution system than is the case with 
distribution lines. They further state that transmission facilities 
generally are not located where cable operators and telecommunications 
carriers need to install facilities. ConEd suggests that transmission 
towers do not even fall within the scope of the statute.
    786. Section 224(f)(1) mandates access to ``any pole, duct, 
conduit, or right-of-way,'' owned or controlled by the utility. The 
utilities do not suggest that transmission facilities do not use poles 
or rights-of-way, for which the statute does mandate the right of 
access. The utilities' arguments for excepting transmission facilities 
from access requirements are based on safety and reliability concerns. 
We believe that the breadth of the language contained in section 
224(f)(1) precludes us from making a blanket determination that 
Congress did not intend to include transmission facilities. As with any 
facility to which access is sought, however, section 224(f)(2) permits 
the electric utility to impose conditions on access to transmission 
facilities, if necessary for reasons of safety and reliability. To the 
extent safety and reliability concerns are greater at a transmission 
facility, the statute permits a utility to impose stricter conditions 
on any grant of access or, in appropriate circumstances, to deny access 
if legitimate safety or reliability concerns cannot be reasonably 
accommodated.
    787. We note that some commenters favor a broad interpretation of 
``pole, duct, conduit, or right-of-way'' because that approach would 
minimize the risk that a ``pathway'' vital to competition could be shut 
off to new competitors. Others argue for a narrow construction of this 
statutory phrase, contending that Congress addressed access to other 
LEC facilities elsewhere in the 1996 Act. We recognize that an overly 
broad interpretation of this phrase could impact the owners and mangers 
of small buildings, as well as small incumbent LECs, by requiring 
additional resources to effectively control and monitor such rights-of-
way located on their properties. We do not believe that section 
224(f)(1) mandates that a utility make space available on the roof of 
its corporate offices for the installation of a telecommunications 
carrier's transmission tower, although access of this nature might be 
mandated pursuant to a request for interconnection or for access to 
unbundled elements under section 251(c)(6). The intent of Congress in 
section 224(f) was to permit cable operators and telecommunications 
carriers to ``piggyback'' along distribution networks owned or 
controlled by utilities, as opposed to granting access to every piece 
of equipment or real property owned or controlled by the utility.
    788. The statute does not describe the specific type of 
telecommunications or cable equipment that may be attached when access 
to utility facilities is mandated. We do not believe that establishing 
an exhaustive list of such equipment is advisable or even possible. We 
presume that the size, weight, and other characteristics of attaching 
equipment have an impact on the utility's assessment of the factors 
determined by the statute to be pertinent--capacity, safety, 
reliability, and engineering principles. The question of access should 
be decided based on those factors.
3. Constitutional Takings
a. Background
    789. The access provisions of section 224(f) restrict the right of 
a utility to exclude third parties from its property and therefore may 
raise Fifth Amendment issues. While we have no jurisdiction to 
determine the constitutionality of a federal statute, constitutional 
concerns are relevant for purposes of construing a statute.
b. Discussion
    790. Section 224(f)(1) mandates that a utility grant access to a 
requesting telecommunications provider or cable system operator, 
subject to certain conditions that we discuss elsewhere in this Order. 
That provision is not reasonably susceptible of a reading that gives 
the pole owner the choice of whether to grant telecommunications 
carriers or cable television systems access. Even if such mandatory 
access results in a taking, we cannot agree that it necessarily raises 
a constitutional issue. The Fifth Amendment permits takings as long the 
property owner receives just compensation for the property taken.
    791. As for the amount of compensation provided under the statute, 
GTE suggests that mandatory access will result in an unconstitutional 
taking when considered in conjunction with the methodology for pole 
attachment rates set forth in section 224(e)(2). We, of course, have no 
power to declare any provision of the Communications Act 
unconstitutional. In any event, we cannot agree. Congress has provided 
for compensation to pole owners, in the event that they cannot resolve 
a dispute with telecommunications carriers regarding the charges for 
use of the owners' poles, that would allow them to recover the cost of 
providing usable space to each entity and two-thirds of the cost of the 
unusable space apportioned among such users. The Commission soon will 
initiate a separate rulemaking proceeding that will give greater 
content to this statutory standard. GTE and others may present their 
just compensation arguments with respect to the ratemaking standards 
the Commission adopts in that proceeding. GTE has not shown here, 
however, how the statutory standard contained in section 224(e) 
necessarily would deny pole owners just compensation.
4. Modifications
a. Background
    792. In the NPRM we sought comment on section 224(h) which 
provides:

    Whenever the owner of a pole, duct, conduit, or right-of-way 
intends to modify or alter such pole, duct, conduit, or right-of-
way, the owner shall provide written notification of such action to 
any entity that has obtained an attachment to such conduit or right-
of-way so that such entity may have a reasonable opportunity to add 
to or modify its existing attachment. Any entity that adds to or 
modifies its existing attachment after receiving such notification 
shall bear a proportionate share of the costs incurred by the owner 
in making such pole, duct, conduit, or right-of-way accessible.

    793. The NPRM requested comments addressing the manner and timing 
of the notice that must be provided to ensure a reasonable opportunity 
to add to or modify its attachment. In addition, we sought comment 
regarding the establishment of rules apportioning the cost of a 
modification among the various users of the modified facility. Finally, 
we requested comment on whether any payment of costs should be offset 
by the potential increase in revenues to the owner. If, for example, an 
owner modifies a pole to allow additional attachments that generate 
additional fees for the owner, should such revenues offset the share of 
modification costs borne by entities with preexisting access to the 
pole?

[[Page 45594]]

b. Discussion
    794. We recognize that, when a modification is planned, parties 
with preexisting attachments to a pole or conduit need time to evaluate 
how the proposed modification affects their interest and whether 
activity related to the modification presents an opportunity to adjust 
the attachment in a desirable manner. At the same time, we also 
recognize that not all adjustments to utility facilities are alike. 
Some adjustments may be sufficiently routine or minor as to not create 
the type of opportunity that triggers the notice requirement. Indeed, 
it is possible that in some cases lengthy notice requirements could 
delay unnecessarily the kinds of modifications that would expedite the 
onset of meaningful competition in the provision of telecommunications 
services. Although the period of advance notice has varied widely among 
commenters, we note that 60 days has been advocated by several parties.
    795. Several commenters expressed a preference for negotiated 
notification terms. They have explained that circumstances will vary 
among owners of facilities. The time needed to commence a modification 
could vary according to pole conditions, technological improvements and 
demand growth. Attaching parties in rural markets may need more time to 
study facilities than facility users in urban markets. To demonstrate 
their ability to develop appropriate negotiated agreements, some 
commenters have described notice requirements in existing agreements. 
Such cases, they contend, illustrate that notification rules are 
unnecessary.
    796. We conclude that, absent a private agreement establishing 
notification procedures, written notification of a modification must be 
provided to parties holding attachments on the facility to be modified 
at least 60 days prior to the commencement of the physical modification 
itself. Notice should be sufficiently specific to apprise the recipient 
of the nature and scope of the planned modification. These notice 
requirements should provide small entities with sufficient time to 
evaluate the impact of or opportunities made possible by the proposed 
modifications on their interests and plan accordingly. If the 
contemplated modification involves an emergency situation for which 
advanced written notice would prove impractical, the notice requirement 
does not apply except that notice should be given as soon as reasonably 
practicable, which in some cases may be after the modification is 
completed. Further, we believe that the burden of requiring specific 
written notice of routine maintenance activities would not produce a 
commensurate benefit. Utilities and parties with attachments should 
exchange maintenance handbooks or other written descriptions of their 
standard maintenance practices. Changes to these practices should be 
made only upon 60 days written notice. Recognizing that the parties 
themselves are best able to determine the circumstances where notice 
would be reasonable and sufficient, as well as the types of 
modifications that should trigger notice obligations, we encourage the 
owner of a facility and parties with attachments to negotiate 
acceptable notification terms.
    797. Even with the adoption of a specific notice period, however, 
we still encourage communication among owners and attaching parties. 
Indeed, in cases where owners and users routinely share information 
about upgrades and modifications, agreements regarding notice periods 
and procedures are ancillary matters.
    798. With respect to the allocation of modification costs, we 
conclude that, to the extent the cost of a modification is incurred for 
the specific benefit of any particular party, the benefiting party will 
be obligated to assume the cost of the modification, or to bear its 
proportionate share of cost with all other attaching entities 
participating in the modification. If a user's modification affects the 
attachments of others who do not initiate or request the modification, 
such as the movement of other attachments as part of a primary 
modification, the modification cost will be covered by the initiating 
or requesting party. Where multiple parties join in the modification, 
each party's proportionate share of the total cost shall be based on 
the ratio of the amount of new space occupied by that party to the 
total amount of new space occupied by all of the parties joining in the 
modification. For example, a CAP's access request might require the 
installation of a new pole that is five feet taller than the old pole, 
even though the CAP needs only two feet of space. At the same time, a 
cable operator may claim one foot of the newly-created capacity. If 
these were the only parties participating in the modification, the CAP 
would pay two-thirds of the modification costs and the cable operator 
one-third.
    799. As a general approach, requiring that modification costs be 
paid only by entities for whose benefit the modification is made 
simplifies the modification process. For these purposes, however, if an 
entity uses a proposed modification as an opportunity to adjust its 
preexisting attachment, the ``piggybacking'' entity should share in the 
overall cost of the modification to reflect its contribution to the 
resulting structural change. A utility or other party that uses a 
modification as an opportunity to bring its facilities into compliance 
with applicable safety or other requirements will be deemed to be 
sharing in the modification and will be responsible for its share of 
the modification cost. This will discourage parties from postponing 
necessary repairs in an effort to avoid the associated costs.
    800. We recognize that limiting cost burdens to entities that 
initiate a modification, or piggyback on another's modification, may 
confer incidental benefits on other parties with preexisting 
attachments on the newly modified facility. Nevertheless, if a 
modification would not have occurred absent the action of the 
initiating party, the cost should not be borne by those that did not 
take advantage of the opportunity by modifying their own facilities. 
Indeed, the Conference Report accompanying the passage of the 1996 Act 
imposes cost sharing obligations on an entity ``that takes advantage of 
such opportunity to modify its own attachments.'' This suggests that an 
attaching party, incidentally benefiting from a modification, but not 
initiating or affirmatively participating in one, should not be 
responsible for the resulting cost. As for pole owners themselves, the 
imposition of cost burdens for modifications they do not initiate could 
be particularly cumbersome if excess space created by modifications 
remained unused for extended periods.
    801. Apart from entities that initiate modifications and 
preexisting attachers that use the opportunity to modify their own 
attachments, some entities may seek to add new attachments to the 
modified facility after the modification is completed to avoid any 
obligation to share in the cost. If this occurs, the entity initiating 
and paying for the modification might pay the entire cost of expanding 
a facility's capacity only to see a new competitor take advantage of 
the additional capacity without sharing in the cost. Moreover, entities 
with preexisting attachments may, due to cost considerations, forgo the 
opportunity to adjust their attachment only to see a new entrant attach 
to a pole without sharing the modification cost. To protect the 
initiators of modifications from absorbing costs that should be shared 
by others, we will allow the modifying party or parties to

[[Page 45595]]

recover a proportionate share of the modification costs from parties 
that later are able to obtain access as a result of the modification. 
The proportionate share of the subsequent attacher should be reduced to 
take account of depreciation to the pole or other facility that has 
occurred since the modification. These provisions are intended to 
ensure that new entrants, especially small entities with limited 
resources, bear only their proportionate costs and are not forced to 
subsidize their later-entering competitors. To the extent small 
entities avail themselves of this cost-saving mechanism, however, they 
will incur certain record keeping obligations.
    802. Parties requesting or joining in a modification also will be 
responsible for resulting costs to maintain the facility on an ongoing 
basis. We believe determining the method by which to allocate such 
costs can best be resolved in the context of a proceeding addressing 
the determination of appropriate rates for pole attachments or other 
facility uses. We will postpone consideration of these issues until 
such time.
    803. We recognize that in some cases a facility modification will 
create excess capacity that eventually becomes a source of revenue for 
the facility owner, even though the owner did not share in the costs of 
the modification. We do not believe that this requires the owner to use 
those revenues to compensate the parties that did pay for the 
modification. Section 224(h) limits responsibility for modification 
costs to any party that ``adds to or modifies its existing attachment 
after receiving notice'' of a proposed modification. The statute does 
not give that party any interest in the pole or conduit other than 
access. Creating a right for that party to share in future revenues 
from the modification would be tantamount to bestowing an interest that 
the statute withholds. Requiring an owner to offset modification costs 
by the amount of future revenues emanating from the modification 
expands the category of responsible parties based on factors that 
Congress did not identify as relevant. Since Congress did not provide 
for an offset, we will not impose it ourselves. Indeed, a requirement 
that utilities pass additional attachment fees back to parties with 
preexisting attachments may be a disincentive to add new competitors to 
modified facilities, in direct contravention of the general intent of 
Congress.
5. Dispute Resolution
a. Background
    804. Implementation of the access requirements of sections 224 and 
251(b)(4) require the adoption of enforcement procedures. In the NPRM, 
we sought comment on, among other things, whether to impose upon a 
utility the burden of justifying its denial of access to its poles, 
ducts, conduits, and rights-of-way due to lack of capacity, safety, 
reliability, and engineering issues.
b. Discussion
(1) General Complaint Procedures Under Section 224
    805. Section 224(f)(2) provides that an electric utility may deny 
non-discriminatory access ``where there is insufficient capacity and 
for reasons of safety, reliability and generally applicable engineering 
purposes.'' We have determined that other utilities also may consider 
these concerns when faced with an access request. A denial of access, 
while proper in some cases, is an exception to the general mandate of 
section 224(f). We note that utilities contend that they are in the 
best position to determine when access should be denied, because they 
possess the information and expertise to make such decisions and 
because of the varied circumstances impacting these decisions. We think 
it appropriate that the utility bear the burden of justifying why its 
denial of access to a cable television or telecommunications carrier 
fits within that exception. We therefore agree that utilities have the 
ultimate burden of proof in denial-of-access cases. We believe this 
will minimize uncertainty and reduce litigation and transaction costs, 
because new entrants generally, and small entities in particular, are 
unlikely to have access to the relevant information without cooperation 
from the utilities.
    806. We also agree with Virginia Power that a telecommunications 
carrier or cable television provider filing a complaint with the 
Commission must establish a prima facie case. A petitioner's complaint, 
in addition to showing that it is timely filed, must state the grounds 
given for the denial of access, the reasons those grounds are unjust or 
unreasonable, and the remedy sought. The complaint must be supported by 
the written request for access, the utility's response, and information 
supporting its position. The Commission will deny the petitioner's 
claim if a prima facie case is not established. A complaint will not be 
dismissed if a petitioner is unable to obtain a utility's written 
response, or if a petitioner is denied any other relevant information 
by the utility needed to establish a prima facie case. Thus, we expect 
a utility that receives a legitimate inquiry regarding access to its 
facilities or property to make its maps, plats, and other relevant data 
available for inspection and copying by the requesting party, subject 
to reasonable conditions to protect proprietary information. This 
provision eliminates the need for costly discovery in pursuing a claim 
of improper denial of access, allowing attaching parties, including 
small entities with limited resources, to seek redress of such denials.
    807. We agree with the Joint Cable Commenters that ``time is of the 
essence.'' The Joint Cable Commenters contend that the Commission 
should implement an expedited review process for denial of access 
cases. By implementing specific complaint procedures for denial of 
access cases, we seek to establish swift and specific enforcement 
procedures that will allow for competition where access can be 
provided. In order to provide a complete record, written requests for 
access must be provided to the utility. If access is not granted within 
45 days of the request, the utility must confirm the denial in writing 
by the 45th day. Although these written requirements involve some 
recordkeeping obligations, which could impose a burden on small 
incumbent LECs and small entities, we believe that burden is outweighed 
by the benefits of certainty and expedient resolution of disputes which 
this procedure encourages. The denial must be specific, and include all 
relevant evidence or information supporting its denial. It must 
enumerate how the evidence relates to one of the reasons that access 
can be denied under section 224(f)(2), i.e., lack of capacity, safety, 
reliability or engineering standards.
    808. For example, a utility may attempt to deny access because of 
lack of capacity on a 40-foot pole. We would expect a utility to 
provide the information demonstrating why there is no capacity. In 
addition, the utility should show why it declined to replace the pole 
with a 45-foot pole. Upon the receipt of a denial notice from the 
utility, the requesting party shall have 60 days to file its complaint 
with the Commission. We anticipate that by following this procedure the 
Commission will, upon receipt of a complaint, have all relevant 
information upon which to make its decision. The petition must be 
served pursuant to section 1.1404(b) of the Commission's rules. Final 
decisions relating to access will be resolved by the Commission

[[Page 45596]]

expeditiously. Because we are using the expedited process described 
herein, we do not believe stays or other equitable relief will be 
granted in the absence of a specific showing, beyond the prima facie 
case, that such relief is warranted.
(2) Procedures Under Section 251
    809. A telecommunications carrier seeking access to the facilities 
or property of a LEC may invoke section 251(b)(4) in lieu of, or in 
addition to, section 244(f)(1). Because section 251(b)(4) mandates 
access ``on rates terms, and conditions that are consistent with 
section 224,'' we believe that the section 224 complaint procedures 
established above should be available regardless of whether a 
telecommunications provider invokes section 224(f)(1) or section 
251(b)(4), or both.
    810. If a telecommunications carrier seeks access to the facilities 
or property of an incumbent LEC, however, it shall have the option of 
invoking the procedures established by section 252 in lieu of filing a 
complaint under section 224. Section 252 governs procedures for the 
negotiation, arbitration, and approval of certain agreements between 
incumbent LECs and telecommunications carriers. In pertinent part, 
section 252(a)(1) provides:

    Upon receiving a request for interconnection, services, or 
network elements pursuant to section 251, an incumbent local 
exchange carrier may negotiate and enter into a binding agreement 
with the requesting telecommunications carrier or carriers without 
regard to the standards set sforth in subsections (b) or (c) of 
section 251.

    811. Where parties are unable to reach an agreement under this 
section, any party may petition the relevant state commission to 
arbitrate the open issues. In resolving the dispute, the state 
commission must ensure, among other things, that the ultimate 
resolution ``meet[s] the requirements of section 251, including the 
regulations prescribed by the Commission pursuant to section 251 * * 
*.'' The Commission may assume the state's authority under section 252 
if the state ``fails to carry out its responsibility'' under that 
section.
    812. Section 251(c)(1) creates an obligation on the part of an 
incumbent LEC ``to negotiate in good faith in accordance with section 
252 the particular terms and conditions of agreements * * *'' to 
fulfill its section 251(b)(4) obligation. Therefore, a 
telecommunications carrier may seek access to the facilities or 
property of an incumbent LEC pursuant to section 251(b)(4) and trigger 
the negotiation and arbitration procedures of section 252. If a 
telecommunications carrier intends to invoke the section 252 
procedures, it should affirmatively state such intent in its formal 
request for access to the incumbent LEC. We impose this requirement 
because the two procedures have separate deadlines by which the parties 
may or must take certain steps, and therefore the incumbent LEC 
receiving the request has a need to know which procedure has been 
invoked. Section 224 shall be the default procedure that will apply if 
the telecommunications carrier fails to make an affirmative election.
    813. We note that section 252 does not impose any obligations on 
utilities other than incumbent LECs, and does not grant rights to 
entities that are not telecommunications providers. Therefore, section 
252 may be invoked in lieu of section 224 only by a telecommunications 
carrier and only if it is seeking access to the facilities or property 
of an incumbent LEC.
    814. In addition, incumbent LECs cannot use section 251(b)(4) as a 
means of gaining access to the facilities or property of a LEC. A LEC's 
obligation under section 251(b)(4) is to afford access ``on rates, 
terms, and conditions that are consistent with section 224.'' Section 
224 does not prescribe rates, terms, or conditions governing access by 
an incumbent LEC to the facilities or rights-of-way of a competing LEC. 
Indeed, section 224 does not provide access rights to incumbent LECs. 
We cannot infer that section 251(b)(4) restores to an incumbent LEC 
access rights expressly withheld by section 224. We give deference to 
the specific denial of access under section 224 over the more general 
access provisions of section 251(b)(4). Accordingly, no incumbent LEC 
may seek access to the facilities or rights-of-way of a LEC or any 
utility under either section 224 or section 251(b)(4).
6. Reverse Preemption
a. Background
    815. Even prior to enactment of the 1996 Act, section 224(b)(1) 
gave the Commission jurisdiction to ``regulate the rates, terms, and 
conditions for pole attachments * * *.'' Under former section 
224(c)(1), that jurisdiction was preempted where a state regulated such 
matters. Such reverse preemption was conditioned upon the state 
following a certification procedure and meeting certain compliance 
requirements set forth in sections 224(c) (2) and (3). The 1996 Act 
expanded the Commission's jurisdiction to include not just rates, 
terms, and conditions, but also the authority to regulate non-
discriminatory access to poles, ducts, conduits and rights-of-way under 
section 224(f). At the same time, the 1996 Act expanded the preemptive 
authority of states to match the expanded scope of the Commission's 
jurisdiction. Section 224(c)(1) now provides:

    Nothing in this section shall be construed to apply to, or to 
give the Commission jurisdiction with respect to rates, terms and 
conditions, or access to poles, ducts, conduits, and rights-of-way 
as provided in subsection (f), for pole attachments in any case 
where such matters are regulated by the State.
b. Discussion
    816. To resolve this issue, we will begin with access requests that 
can arise solely under section 224(f)(1). These circumstances include 
when a cable system or telecommunications carrier seeks access to the 
facilities or rights-of-way of a non-LEC utility. In such cases, the 
expansion of the Commission's authority to require utilities to provide 
nondiscriminatory access under section 224(f) is countered by a 
corresponding expansion in the scope of a state's authority under 
section 224(c)(1) to preempt federal requirements. The authority of a 
state under section 224(c)(1) to preempt federal regulation in these 
cases is clear.
    817. The issue becomes more complicated when a telecommunications 
carrier seeks access to LEC facilities or property under section 
251(b)(4). By its express terms, section 251(b)(4) imposes upon LECs, 
``[t]he duty to afford access to the poles, ducts, conduits, and 
rights-of-way of such a carrier to competing providers of 
telecommunications services on rates, terms and conditions that are 
consistent with section 224.'' We believe the reference in section 
251(b)(4) to section 224 incorporates all aspects of the latter 
section, including the state preemption authority of section 224(c)(1). 
This interpretation is consistent not only with the plain meaning of 
the statute but with the overall application of sections 251 and 252.
    818. In the 1996 Act, Congress expanded section 224(c)(1) to reach 
access issues. Congress' clear grant of authority to the states to 
preempt federal regulation in these cases undercuts the suggestion that 
Congress sought to establish federal access regulations of universal 
applicability. Moreover, we do not find it significant that the access 
provisions of sections 251 and 271 contain no specific reference to the 
preemptive authority of states under section 224(c)(1), since both 
provisions expressly refer to section 224 generally.

[[Page 45597]]

    819. Thus, when a state has exercised its preemptive authority 
under section 224(c)(1), a LEC satisfies its duty under section 
251(b)(4) to afford access by complying with the state's regulations. 
If a state has not exercised such preemptive authority, the LEC must 
comply with the federal rules. Similarly, when a telecommunications 
carrier seeks access rights from an incumbent LEC by choosing to avail 
itself of the negotiation and arbitration procedures established in 
section 252, a state that has exercised its preemption rights will 
apply its own set of regulations in the arbitration process pursuant to 
section 252 (c)(1). Finally, we note that state regulation in this area 
is subject to the provisions of section 253.
    820. We note that Congress did not amend section 224(c)(2) to 
prescribe a certification procedure with respect to access (as distinct 
from the rates, terms, and conditions of access). Therefore, upon the 
filing of an access complaint with the Commission, the defending party 
or the state itself should come forward to apprise us whether the state 
is regulating such matters. If so, we shall dismiss the complaint 
without prejudice to it being brought in the appropriate state forum. A 
party seeking to show that a state regulates access issues should cite 
to state laws and regulations governing access and establishing a 
procedure for resolving access complaints in a state forum. Especially 
probative will be a requirement that the relevant state authority 
resolve an access complaint within a set period of time following the 
filing of the complaint.

C. Imposing Additional Obligations on LECS

1. Background
    821. Section 251(c) imposes obligations on incumbent LECs in 
addition to the obligations set forth in sections 251 (a) and (b). It 
establishes obligations of incumbent LECs regarding: (1) good faith 
negotiation; (2) interconnection; (3) unbundling network elements; (4) 
resale; (5) providing notice of network changes; and (6) collocation.
    822. Section 251(h)(1) defines an incumbent LEC as a LEC within a 
particular service area that: (1) as of the enactment of the 1996 Act, 
provided telephone exchange service in such area; and (2) as of the 
enactment of the 1996 Act, was deemed to be a member of the exchange 
carrier association pursuant to 47 CFR Sec. 69.601(b) or, on or after 
the enactment of the 1996 Act, became a successor or assign of such 
carrier. Section 252(h)(2) provides that, ``[t]he Commission may, by 
rule, provide for the treatment of a local exchange carrier (or class 
or category thereof) as an incumbent local exchange carrier for 
purposes of this section if (A) such carrier occupies a position in the 
market for telephone exchange service within an area that is comparable 
to the position occupied by a carrier described in paragraph (1); (B) 
such carrier has substantially replaced an incumbent local exchange 
carrier described in paragraph (1); and (C) such treatment is 
consistent with the public interest, convenience, and necessity and the 
purposes of this section.''
    823. In the NPRM, we sought comment on whether we should establish 
at this time standards and procedures by which interested parties could 
prove that a particular LEC should be treated as an incumbent LEC. We 
also sought comment on whether carriers that are not deemed to be 
incumbent LECs under section 251(h) may be required to comply with any 
or all of the obligations that apply to incumbent LECs, and whether 
states may impose on non-incumbent LECs the obligations that are 
imposed on incumbent LECs under section 251(c).
2. Discussion
    824. We conclude that allowing states to impose on non-incumbent 
LECs obligations that the 1996 Act designates as ``Additional 
Obligations on Incumbent Local Exchange Carriers,'' distinct from 
obligations on all LECs, would be inconsistent with the statute. We 
understand that some states may be imposing on non-incumbent LECs 
obligations set forth in section 251(c). See, e.g., Colorado Commission 
comments at 11-12; Draft Decision, State of Connecticut Department of 
Public Utility Control, Docket No. 94-10-04 at 60, 65 (Connecticut 
Commission July 11, 1996); Illinois Commission comments at 19. We 
believe that these actions may be inconsistent with the 1996 Act. Some 
parties assert that certain provisions of the 1996 Act, such as 
sections 252(e)(3) and 253(b), explicitly permit states to impose 
additional obligations. Such additional obligations, however, must be 
consistent with the language and purposes of the 1996 Act.
    825. Section 251(h)(2) sets forth a process by which the FCC may 
decide to treat LECs as incumbent LECs. Thus, when the conditions set 
forth in section 251(h)(2) are met, the 1996 Act contemplates that new 
entrants will be subject to the same obligations imposed on incumbents. 
While we find that states may not unilaterally impose on non-incumbent 
LECs obligations the 1996 Act expressly imposes only on incumbent LECs, 
we find that state commissions or other interested parties could ask 
the FCC to classify a carrier as an incumbent LEC pursuant to section 
251(h)(2). At this time, we decline to adopt specific procedures or 
standards for determining whether a LEC should be treated as an 
incumbent LEC. Instead, we will permit interested parties to ask the 
FCC to issue an order declaring a particular LEC or a class or category 
of LECs to be treated as incumbent LECs. We expect to give particular 
consideration to filings from state commissions. We further anticipate 
that we will not impose incumbent LEC obligations on non-incumbent LECs 
absent a clear and convincing showing that the LEC occupies a position 
in the telephone exchange market comparable to the position held by an 
incumbent LEC, has substantially replaced an incumbent LEC, and that 
such treatment would serve the public interest, convenience, and 
necessity and the purposes of section 251.

XI. Exemptions, Suspensions, and Modifications of Section 251 
Requirements

A. Background

    826. Section 251(f)(1) grants rural telephone companies an 
exemption from section 251(c), until the rural telephone company has 
received a bona fide request for interconnection, services, or network 
elements, and the state commission determines that the exemption should 
be terminated. A rural telephone company is defined as a local exchange 
carrier operating entity to the extent that such entity ``(A) provides 
common carrier service to any local exchange carrier study area that 
does not include either-- (i) any incorporated place of 10,000 
inhabitants or more, or any part thereof * * *; or (ii) any territory, 
incorporated or unincorporated, included in an urbanized area * * *; 
(B) provides telephone exchange service, including exchange access, to 
fewer than 50,000 access lines; (C) provides telephone exchange service 
to any local exchange carrier study area with fewer than 100,000 access 
lines; or (D) has less than 15 percent of its access lines in 
communities of more than 50,000 on the date of enactment of the 
Telecommunications Act of 1996.'' 47 U.S.C. 153(37). Section 251(f)(2) 
allows LECs with fewer than two percent of the nation's subscriber 
lines to petition a state commission for a suspension or modification 
of any requirements of sections 251 (b) and (c). Section 251(f)

[[Page 45598]]

imposes a duty on state commissions to make determinations under this 
section, and establishes the criteria and procedures for the state 
commissions to follow. In the NPRM, we tentatively concluded that state 
commissions have the sole authority to make determinations under 
section 251(f). In addition, we sought comment on whether we should 
issue guidelines to assist state commissions when they make 
determinations regarding exemptions, suspensions, or modifications 
under section 251(f).
    827. Although subsections (f)(1) and (f)(2) both address the 
circumstances under which an incumbent LEC could be relieved of duties 
otherwise imposed by section 251, subsection 251(f)(2) also applies to 
non-incumbent LECs. The standard for determining whether to exempt a 
carrier under subsection 251(f)(1) is different from the standard for 
determining whether to grant a suspension or modification under 
subsection (f)(2). Subsection 251(f)(1)(B) requires state commissions 
to determine that terminating a rural exemption is consistent with the 
universal service provisions of the 1996 Act. Subsection 
251(f)(2)(A)(i) requires state commissions to grant a suspension or 
modification if it is necessary to ``avoid a significant adverse 
economic impact on users of telecommunications services generally,'' 
and subsection 251(f)(2)(B) requires a suspension or modification to be 
``consistent with the public interest, convenience, and necessity.'' 
Although we address these two subsections together, we highlight 
instances in which we believe that differences in statutory language 
require different treatment by state commissions.
    828. We discuss below issues raised by the commenters, and 
establish some rules regarding the requirements of section 251(f) that 
we believe will assist state commissions as they carry out their duties 
under section 251(f). For the most part, however, we expect that states 
will interpret the requirements of section 251(f) through rulemaking 
and adjudicative proceedings. We may in the future initiate a Notice of 
Proposed Rulemaking on certain additional issues raised by section 
251(f) if it appears that further action by the Commission is 
warranted.

B. Need for National Rules

1. Discussion
    829. We agree with parties, including small incumbent LECs, who 
argue that determining whether a telephone company is entitled, 
pursuant to section 251(f), to exemption, suspension, or modification 
of the requirements of section 251 generally should be left to state 
commissions. Requests made pursuant to section 251(f) seek to carve out 
exceptions to application of the section 251 rules that we are 
establishing in this proceeding. We find that Congress intended the 
section 251 requirements, and the Commission's implementing rules 
thereunder, to apply to all carriers throughout the country, except in 
the circumstances delineated in the statute. We find convincing 
assertions that it would be an overwhelming task at this time for the 
Commission to try to anticipate and establish national rules for 
determining when our generally-applicable rules should not be imposed 
upon carriers. Therefore, we establish in this Order a very limited set 
of rules that will assist states in their application of the provisions 
in section 251(f).
    830. Many parties have proposed varying interpretations of the 
provisions in section 251(f), and have asked for Commission 
determination or a statement of agreement. Because it appears that many 
parties welcome some guidance from the Commission, we briefly set forth 
our interpretation of certain provisions of section 251(f). Such 
statements will assist parties and, in particular, state commissions 
that must make determinations regarding requests for exemption, 
suspension, and modification.

C. Application of Section 251(f)

1. Discussion
    831. Congress generally intended the requirements in section 251 to 
apply to carriers across the country, but Congress recognized that in 
some cases, it might be unfair or inappropriate to apply all of the 
requirements to smaller or rural telephone companies. We believe that 
Congress intended exemption, suspension, or modification of the section 
251 requirements to be the exception rather than the rule, and to apply 
only to the extent, and for the period of time, that policy 
considerations justify such exemption, suspension, or modification. We 
believe that Congress did not intend to insulate smaller or rural LECs 
from competition, and thereby prevent subscribers in those communities 
from obtaining the benefits of competitive local exchange service. 
Thus, we believe that, in order to justify continued exemption once a 
bona fide request has been made, or to justify suspension, or 
modification of the Commission's section 251 requirements, a LEC must 
offer evidence that application of those requirements would be likely 
to cause undue economic burdens beyond the economic burdens typically 
associated with efficient competitive entry. State commissions will 
need to decide on a case-by-case basis whether such a showing has been 
made.
    832. Given the pro-competitive focus of the 1996 Act, we find that 
rural LECs must prove to the state commission that they should continue 
to be exempt pursuant to section 251(f)(1) from requirements of section 
251(c), once a bona-fide request has been made, and that smaller 
companies must prove to the state commission, pursuant to section 
251(f)(2), that a suspension or modification of requirements of 
sections 251 (b) or (c) should be granted. We conclude that it is 
appropriate to place the burden of proof on the party seeking relief 
from otherwise applicable requirements. Moreover, the party seeking 
exemption, suspension, or modification is in control of the relevant 
information necessary for the state to make a determination regarding 
the request. A rural company that falls within section 251(f)(1) is not 
required to make any showing until it receives a bona fide request for 
interconnection, services, or network elements. We decline at this time 
to establish guidelines regarding what constitutes a bona fide request. 
We also decline in this Report and Order to adopt national rules or 
guidelines regarding other aspects of section 251(f). For example, we 
will not rule in this proceeding on the universal service duties of 
requesting carriers that seek to compete with rural LECs. We may offer 
guidance on these matters at a later date, if we believe it is 
necessary and appropriate.
    833. We find that Congress intended section 251(f)(2) only to apply 
to companies that, at the holding company level, have fewer than two 
percent of subscriber lines nationwide. This is consistent with the 
fact that the standard is based on the percent of subscriber lines that 
a carrier has ``in the aggregate nationwide.'' Moreover, any other 
interpretation would permit almost any company, including Bell 
Atlantic, Ameritech, and GTE affiliates, to take advantage of the 
suspension and modification provisions in section 251(f)(2). Such a 
conclusion would render the two percent limitation virtually 
meaningless.
    834. We note that some parties recommend that, in adopting rules 
pursuant to section 251, the Commission provide different treatment or 
impose different obligations on smaller or rural carriers. We conclude 
that section 251(f) adequately provides for varying treatment for 
smaller or rural LECs where such variances are justified in particular 
instances. We conclude

[[Page 45599]]

that there is no basis in the record for adopting other special rules, 
or limiting the application of our rules to smaller or rural LECs.

XIII. Advanced Telecommunications Capabilities

    835. Section 706(a) provides that the Commission ``shall encourage 
the deployment on a reasonable and timely basis of advanced 
telecommunications capability to all Americans (including, in 
particular, elementary and secondary schools and classrooms) by 
utilizing, in a manner consistent with the public interest, 
convenience, and necessity, price cap regulation, regulatory 
forbearance, measures that promote competition in the local 
telecommunications market, or other regulating methods that remove 
barriers to infrastructure investment.'' In the NPRM, we sought comment 
on how we can advance Congress's section 706(a) goal within the context 
of our implementation of sections 251 and 252.
    836. A number of parties suggest that rules allowing them to 
compete effectively and earn a profit in the telecommunications 
industry would assist the industry in providing telecommunications 
services to all Americans. MFS suggests that ``all LECs should be 
required, as a condition of eligibility for universal service 
subsidies, to meet network modernization standards for rural telephone 
companies.'' Several state commissions indicate that they have already 
established programs to assist institutions eligible under section 706 
in deploying advanced telecommunications services. The Alliance for 
Public Technology asserts that section 706 should underlie all of the 
FCC's proceedings. Ericsson states that the industry should work with 
government agencies to promote leading edge technology to ensure that 
it is introduced on a reasonably timely basis. For example, it contends 
that ``Plug and Play Internet use'' will greatly help the public and 
schools access information, and that advanced technology such as 
asynchronous transfer mode (ATM), wireless data/video, and AIN will 
enhance interconnection capabilities of public and private networks. 
The Illinois Commission contends that, depending on the pricing 
standard the Commission adopts for interconnection and access to 
unbundled elements, and the Commission's interpretation of the 
prohibition against discrimination, the Commission should adopt special 
rules for carriers when they provide interconnection or access to 
unbundled network elements to serve a school, library, or healthcare 
provider.
    837. We decline to adopt rules regarding section 706 in this 
proceeding. We intend to address issues related to section 706 in a 
separate proceeding.

XIV. Provisions of Section 252

A. Section 252(e)(5)

1. Background
    838. Section 252(e)(5) directs the Commission to assume 
responsibility for any proceeding or matter in which the state 
commission ``fails to act to carry out its responsibility'' under 
section 252. In the NPRM, we asked whether the Commission should 
establish rules and regulations necessary to carry out our obligation 
under section 252(e)(5). In addition, we sought comment on whether in 
this proceeding we should establish regulations necessary and 
appropriate to carry out our obligations under section 252(e)(5). In 
particular, we sought comment on what constitutes notice of failure to 
act, what procedures, if any, we should establish for parties to notify 
the Commission, and what are the circumstances under which a state 
commission should be deemed to have ``fail[ed] to act'' under section 
252(e)(5).
    839. Section 252(e)(4) provides that, if the state commission does 
not approve or reject (1) a negotiated agreement within 90 days, or (2) 
an arbitrated agreement within 30 days, from the time the agreement is 
submitted by the parties, the agreement shall be ``deemed approved.'' 
We sought comment on the relationship between this provision and our 
obligation to assume responsibility under section 252(e)(5). We also 
sought comment on whether the Commission, once it assumes the 
responsibility of the state commission, is bound by all of the laws and 
standards that would have applied to the state commission, and whether 
the Commission is authorized to determine whether an agreement is 
consistent with applicable state law as the state commission would have 
been under section 252(e)(3). In addition, we sought comment on 
whether, once the Commission assumes responsibility under section 
252(e)(5), it retains jurisdiction, or whether that matter or 
proceeding subsequently should be remanded to the state.
    840. Finally, we sought comment on whether we should adopt, in this 
proceeding, some standards or methods for arbitrating disputes in the 
event we must conduct an arbitration under section 252(e)(5). We noted 
some of the benefits and drawbacks of both ``final offer'' arbitration 
and open-ended arbitration, and asked for comment on both.
2. Discussion
    841. After careful review of the record, we are convinced that 
establishing regulations to carry out our obligations under section 
252(e)(5) will provide for an efficient and fair transition from state 
jurisdiction should we have to assume the responsibility of the state 
commission under Section 252(e)(5). The rules we establish in this 
section with respect to arbitration under section 252 apply only to 
instances where the Commission assumes jurisdiction under section 
252(e)(5); we do not purport to advise states on how to conduct 
arbitration when the Commission has not assumed jurisdiction. The rules 
we establish will give notice of the procedures and standards the 
Commission would apply to mediation and arbitration, avoid delay if the 
Commission had to arbitrate disputes in the near future, and may also 
offer guidance the states may, at their discretion, wish to consider in 
implementing their own mediation and arbitration procedures and 
standards. We decline to adopt national rules governing state 
arbitration procedures. We believe the states are in a better position 
to develop mediation and arbitration rules that support the objectives 
of the 1996 Act. States may develop specific measures that address the 
concerns of small entities and small incumbent LECs participating in 
mediation or arbitration.
    842. The rules we adopt herein are minimum, interim procedures. 
Adopting minimum interim procedures now will allow the Commission to 
learn from the initial experiences and gain a better understanding of 
what types of situations may arise that require Commission action. We 
note that the Commission is not required to adopt procedures and 
standards for mediation and arbitration within the six-month statutory 
deadline and that, by adopting minimum interim procedures, the 
Commission can better direct its resources to more pressing matters 
that fall within the six-month statutory deadline.
    843. Regarding what constitutes a state's ``failure to act to carry 
out its responsibility under'' section 252, the Commission was 
presented with numerous options. The Commission will not take an 
expansive view of what constitutes a state's ``failure to act.'' 
Instead, the Commission interprets ``failure to act'' to mean a state's 
failure to complete its duties in a timely manner. This would limit 
Commission action to instances where a state commission fails to 
respond, within a reasonable time, to a request for

[[Page 45600]]

mediation or arbitration, or fails to complete arbitration within the 
time limits of section 252(b)(4)(C). The Commission will place the 
burden of proof on parties alleging that the state commission has 
failed to respond to a request for mediation or arbitration within a 
reasonable time frame. We note the work done by states to date in 
putting in place procedures and regulations governing arbitration and 
believe that states will meet their responsibilities and obligations 
under the 1996 Act. See, e.g., In the Matter of the Implementation of 
the Mediation and Arbitration Provisions of the Federal 
Telecommunications Act of 1996, Case No. 96-463-TP-UNC, Ohio 
Commission, (May 30, 1996); Illinois Commerce Commission On Its Own 
Motion Adoption of 83 Ill. Adm. Code 761 to Implement the Arbitration 
Provisions of Section 252 of the Telecommunications Act of 1996, Docket 
No. 96-0297, Illinois Commission (June 14, 1996).
    844. We agree with the majority of commenters that argue that our 
authority to assume the state commission's responsibilities is not 
triggered when an agreement is ``deemed approved'' under section 
252(e)(4) due to state commission inaction. Section 252(e)(4) provides 
for automatic approval if a state fails to approve or reject a 
negotiated or arbitrated agreement within 90 days or 30 days, 
respectively. Rules of statutory construction require us to give 
meaning to all provisions and to read provisions consistently, where it 
is possible to do so. We thus conclude that the most reasonable 
interpretation is that automatic approval under section 252(e)(4) does 
not constitute a failure to act.
    845. We also believe that we should establish interim procedures 
for interested parties to notify the Commission that a state commission 
has failed to act under section 252. We believe that parties should be 
required to file a detailed written petition, backed by affidavit, that 
will, at the outset, give the Commission a better understanding of the 
issues involved and the action, or lack of action, taken by the state 
commission. Allowing less detailed notification increases the 
likelihood that frivolous requests will be made. With less detailed 
notification, the Commission's investigations would be broader and more 
burdensome. A detailed written petition will facilitate a decision 
about whether the Commission should assume jurisdiction based on 
section 252(e)(5).
    846. The moving party should submit a petition to the Secretary of 
the Commission stating with specificity the basis for the petition and 
any information that supports the claim that the state has failed to 
act, including, but not limited to the applicable provision(s) of the 
Act and the factual circumstances which support a finding that a state 
has failed to act. The moving party must ensure that the applicable 
state commission and the parties to the proceeding or matter for which 
preemption is sought are served with the petition on the same date the 
party serves the petition on the Commission. The petition will serve as 
notice to parties to the state proceeding and the state commission who 
will have fifteen days from the date the petition is filed with the 
Commission to comment. Under section 252(e)(5), the Commission must 
``issue an order preempting the state commission's jurisdiction of that 
proceeding or matter'' no later than 90 days from the date the petition 
is filed. If the Commission takes notice, as section 252(e)(5) permits, 
that a state commission has failed to act, it will, on its own motion, 
issue a public notice and provide fifteen days for interested parties 
to submit comment on whether the Commission should assume 
responsibility under section 252(e)(5).
    847. If the Commission assumes authority under section 252(e)(5), 
the Commission must also decide whether it retains authority for that 
proceeding or matter. We agree with those parties who argue that, once 
the Commission assumes jurisdiction of a proceeding or matter, it 
retains authority for that proceeding or matter. For example, if the 
Commission obtains jurisdiction after a state commission fails to 
respond to a request for arbitration, the Commission maintains 
jurisdiction over the arbitration proceeding. Therefore, once the 
proceeding is before the Commission, any and all further action 
regarding that proceeding or matter will be before the Commission. We 
note that there is no provision in the Act for returning jurisdiction 
to the state commission; moreover, the Commission, with significant 
knowledge of the issues at hand, would be in the best position 
efficiently to conclude the matter. Thus, as both a legal and policy 
matter, we believe that the Commission retains jurisdiction over any 
matter and proceeding for which it assumes responsibility under Section 
252(e)(5).
    848. We reject the suggestion by some parties that, once the 
Commission has mediated or arbitrated an agreement, the agreement must 
be submitted to the state commission for approval under state law. We 
note that section 252(e)(5) provides for the Commission to ``assume the 
responsibility of the State commission under this section with respect 
to the proceeding or matter and act for the State commission.'' This 
includes acting for the state commission under section 252(e)(1), which 
calls for state commission approval of ``any interconnection agreement 
adopted by negotiation or arbitration.'' We, therefore, do not read 
section 252(e)(1) or any other provision as calling for state 
commission approval or rejection of agreements mediated or arbitrated 
by the Commission. In those instances where a state has failed to act, 
the Commission acts on behalf of the state and no additional state 
approval is required.
    849. Requirements set forth in section 252(c) for arbitrated 
agreements would apply to arbitration conducted by the Commission. We 
see no reason, and no party has suggested a policy or legal basis, for 
not applying such standards when the Commission conducts arbitration. 
Thus, arbitrated agreements must: (1) meet the requirements of section 
251, including regulations prescribed by the Commission pursuant to 
section 251; (2) establish any rates for interconnection, services, or 
network elements according to section 252(d); and (3) provide a 
schedule for implementation of the terms and conditions by the parties 
to the agreement. We reject the suggestion made by some parties that, 
if the Commission steps into the state commission role, it is bound by 
state laws and standards that would have applied to the state 
commission. While states are permitted to establish and enforce other 
requirements, these are not binding standards for arbitrated agreements 
under section 252(c). Moreover, the resources and time potentially 
needed to review adequately and interpret the different laws and 
standards of each state render this suggestion untenable. Finally, we 
conclude that it would not make sense to apply to the Commission the 
timing requirements that section 252(b)(4)(c) imposes on state 
commissions. The Commission, in some instances, might not even assume 
jurisdiction until nine months (or more) have lapsed since a section 
251 request was initiated.
    850. Based on the comments of the parties, we conclude that a 
``final offer'' method of arbitration, similar to the approach 
recommended by Vanguard, would best serve the public interest. Under 
``final offer'' arbitration, each party to the negotiation proposes its 
best and final offer and the arbitrator determines which of the 
proposals become binding. The arbitrator would

[[Page 45601]]

have the option of choosing one of the two proposals in its entirety, 
or the arbitrator could decide on an issue-by-issue basis. Each final 
offer must: (1) meet the requirements of section 251, including the 
Commission's rules thereunder; (2) establish rates for interconnection, 
services, or network elements according to section 252(d); and (3) 
provide a schedule for implementation of the terms and conditions by 
the parties to the agreement. If a final offer submitted by one or more 
parties fails to comply with these requirements, the arbitrator would 
have discretion to take steps designed to result in an arbitrated 
agreement that satisfies the requirements of section 252(c), including 
requiring parties to submit new final offers within a time frame 
specified by the arbitrator, or adopting a result not submitted by any 
party that is consistent with the requirements in section 252(c).
    851. The parties could continue to negotiate an agreement after 
they submit their proposals and before the arbitrator makes a decision. 
Under this approach, the Commission will encourage negotiations, with 
or without the assistance of the arbitrator, to continue after 
arbitration offers are exchanged. Parties are not precluded from 
submitting subsequent final offers following such negotiations. We 
believe that permitting post-offer negotiations will increase the 
likelihood that the parties will reach consensus on unresolved issues. 
In addition, permitting post-offer negotiations will increase 
flexibility and will allow parties to tailor counter-proposals after 
arbitration offers are exchanged. To provide an opportunity for final 
post-offer negotiation, the arbitrator will not issue a decision for at 
least 15 days after submission of the final offers by the parties. In 
addition, the offers must be consistent with section 251, including the 
regulations prescribed by the Commission. We reject SBC's suggestion 
that an arbitrated agreement is not binding on the parties. Absent 
mutual agreement to different terms, the decision reached through 
arbitration is binding. We conclude that it would be inconsistent with 
the 1996 Act to require incumbent LECs to provide interconnection, 
services, and unbundled elements, impose a duty to negotiate in good 
faith and a right to arbitration, and then permit incumbent LECs to not 
be bound by an arbitrated determination. We also believe that, although 
competing providers do not have an affirmative duty to enter into 
agreements under section 252, a requesting carrier might face penalties 
if, by refusing to enter into an arbitrated agreement, that carrier is 
deemed to have failed to negotiate in good faith. Such penalties should 
serve as a disincentive for requesting carriers to force an incumbent 
LEC to expand resources in arbitration if the requesting carrier does 
not intend to abide by the arbitrated decision.
    852. Adopting a ``final offer'' method of arbitration and 
encouraging negotiations to continue allows us to maintain the benefits 
of final offer arbitration, giving parties an incentive to submit 
realistic ``final offers,'' while providing additional flexibility for 
the parties to agree to a resolution that best serves their interests. 
To the extent that these procedures encourage parties to negotiate 
voluntarily rather than arbitrate, such negotiated agreements will be 
subject to review pursuant to section 252(e)(2)(A), which would allow 
the Commission to reject agreements if they are inconsistent with the 
public interest. This approach also addresses the argument that under 
``final offer'' arbitration neither offer might best serve the public 
interest, because it allows the parties to obtain feedback from the 
arbitrator on public interest matters.
    853. We believe that the arbitration proceedings generally should 
be limited to the requesting carrier and the incumbent local exchange 
provider. This will allow for a more efficient process and minimize the 
amount of time needed to resolve disputed issues. We believe that 
opening the process to all third parties would be unwieldy and would 
delay the process. We will, however, consider requests by third parties 
to submit written pleadings. This may, in some instances, allow 
interested parties to identify important public policy issues not 
raised by parties to an arbitration.

B. Requirements of Section 252(i)

 1. Background
    854. Section 251 requires that interconnection, unbundled element, 
and collocation rates be ``nondiscriminatory'' and prohibits the 
imposition of ``discriminatory conditions'' on the resale of 
telecommunications services. Section 252(i) of the 1996 Act provides 
that a ``local exchange carrier shall make available any 
interconnection, service, or network element provided under an 
agreement approved under [section 252] to which it is a party to any 
other requesting telecommunications carrier upon the same terms and 
conditions as those provided in the agreement.'' In the NPRM, we 
expressed the view that section 252(i) appears to be a primary tool of 
the 1996 Act for preventing discrimination under section 251, and we 
sought comment on whether we should adopt national standards for 
resolving disputes under section 252(i) in the event that we must 
assume the state's responsibilities pursuant to section 252(e)(5). In 
addition, because we may need to interpret section 252(i) if we assume 
the state commission's responsibilities, we sought comment on the 
meaning of section 252(i).
    855. We also sought comment in the NPRM on whether section 252(i) 
requires that only similarly-situated carriers may enforce against 
incumbent LECs provisions of agreements filed with state commissions, 
and, if so, how ``similarly-situated carrier'' should be defined. In 
particular, we asked whether section 252(i) requires that the same 
rates for interconnection must be offered to all requesting carriers 
regardless of the cost of serving that carrier, or whether it would be 
consistent with the statute to permit different rates if the costs of 
serving carriers are different. We also asked whether the section can 
be interpreted to allow incumbent LECs to make available 
interconnection, services, or network elements only to requesting 
carriers serving a comparable class of subscribers or providing the 
same service (i.e., local, access, or interexchange) as the original 
parties to the agreement. In the NPRM, we tentatively concluded that 
the language of the statute appears to preclude such differential 
treatment among carriers.
    856. Additionally, we sought comment in the NPRM on whether section 
252(i) permits requesting telecommunications carriers to choose among 
individual provisions of publicly-filed interconnection agreements or 
whether they must subscribe to an entire agreement. We also sought 
comment regarding what time period an agreement must remain available 
for use by other requesting telecommunications carriers.
2. Discussion
    857. We conclude that it will assist the carriers in determining 
their respective obligations, facilitate the development of a single, 
uniform legal interpretation of the Act's requirements and promote a 
procompetitive, national policy framework to adopt national standards 
to implement section 252(i). Issues such as whether section 252(i) 
allows requesting telecommunications carriers to choose among 
provisions of prior interconnection agreements or requires them to 
accept an entire agreement are issues of law that should not vary from 
state to state and are also central to the statutory scheme and to

[[Page 45602]]

the emergence of competition. National standards will help state 
commissions and parties to expedite the resolution of disputes under 
section 252(i).
    858. We conclude that the text of section 252(i) supports 
requesting carriers' ability to choose among individual provisions 
contained in publicly filed interconnection agreements. As we note 
above, section 252(i) provides that a ``local exchange carrier shall 
make available any interconnection, service, or network element 
provided under an agreement * * * to which it is a party to any other 
requesting telecommunications carrier upon the same terms and 
conditions as those provided in the agreement.'' Thus, Congress drew a 
distinction between ``any interconnection, service, or network 
element[s] provided under an agreement,'' which the statute lists 
individually, and agreements in their totality. Requiring requesting 
carriers to elect entire agreements, instead of the provisions relating 
to specific elements, would render as mere surplusage the words ``any 
interconnection, service, or network element.''
    859. We disagree with BellSouth regarding the significance of the 
legislative history quoted in the NPRM. The Conference Committee 
amended section 251(g), S. 652's predecessor to section 252(i), and 
changed ``service, facility, or function'' to ``interconnection, 
service, or element.'' The House of Representatives' bill did not 
contain a version of section 252(i). Although H.R. 1555's section 
244(d) contained similar ideas, its language and structure are 
sufficiently different from that of section 252(i) that we do not 
consider section 244(d) to be a prior version of section 252(i). We 
find that section 252(i)'s language does not differ substantively from 
the text of the Senate bill's section 251(g). The Senate Commerce 
Committee stated its provision, section 251(g), was intended to ``make 
interconnection more efficient by making available to other carriers 
the individual elements of agreements that have been previously 
negotiated.''
    860. We also find that practical concerns support our 
interpretation. As observed by AT&T and others, failure to make 
provisions available on an unbundled basis could encourage an incumbent 
LEC to insert into its agreement onerous terms for a service or element 
that the original carrier does not need, in order to discourage 
subsequent carriers from making a request under that agreement. In 
addition, we observe that different new entrants face differing 
technical constraints and costs. Since few new entrants would be 
willing to elect an entire agreement that would not reflect their costs 
and the specific technical characteristics of their networks or would 
not be consistent with their business plans, requiring requesting 
carriers to elect an entire agreement would appear to eviscerate the 
obligation Congress imposed in section 252(i).
    861. We also choose this interpretation despite concerns voiced by 
some incumbent LECs that allowing carriers to choose among provisions 
will harm the public interest by slowing down the process of reaching 
interconnection agreements by making incumbent LECs less likely to 
compromise. In reaching this conclusion, we observe that new entrants, 
who stand to lose the most if negotiations are delayed, generally do 
not argue that concern over slow negotiations would outweigh the 
benefits they would derive from being able to choose among terms of 
publicly filed agreements. Unbundled access to agreement provisions 
will enable smaller carriers who lack bargaining power to obtain 
favorable terms and conditions--including rates--negotiated by large 
IXCs, and speed the emergence of robust competition.
    862. We conclude that incumbent LECs must permit third parties to 
obtain access under section 252(i) to any individual interconnection, 
service, or network element arrangement on the same terms and 
conditions as those contained in any agreement approved under section 
252. We find that this level of disaggregation is mandated by section 
252(a)(1), which requires that agreements shall include ``charges for 
interconnection and each service or network element included in the 
agreement,'' and section 251(c)(3), which requires incumbent LECs to 
provide ``non-discriminatory access to network elements on an unbundled 
basis.'' In practical terms, this means that a carrier may obtain 
access to individual elements such as unbundled loops at the same 
rates, terms, and conditions as contained in any approved agreement. We 
agree with ALTS that such a view comports with the statute, and lessens 
the concerns of carriers that argue that unbundled availability will 
delay negotiations.
    863. We reject GTE's argument that section 252(i)'s statement, that 
requesting carriers must receive individual elements ``upon the same 
terms and conditions'' as those contained in the agreement, precludes 
unbundled availability of individual elements. GTE's argument fails to 
give meaning to Congress's distinction between agreements and elements, 
and ignores the 1996 Act's prime goals of nondiscriminatory treatment 
of carriers and promotion of competition. Instead, we conclude that the 
``same terms and conditions'' that an incumbent LEC may insist upon 
shall relate solely to the individual interconnection, service, or 
element being requested under section 252(i). For instance, where an 
incumbent LEC and a new entrant have agreed upon a rate contained in a 
five-year agreement, section 252(i) does not necessarily entitle a 
third party to receive the same rate for a three-year commitment. 
Similarly, that one carrier has negotiated a volume discount on loops 
does not automatically entitle a third party to obtain the same rate 
for a smaller amount of loops. Given the primary purpose of section 
252(i) of preventing discrimination, we require incumbent LECs seeking 
to require a third party agree to certain terms and conditions to 
exercise its rights under section 252(i) to prove to the state 
commission that the terms and conditions were legitimately related to 
the purchase of the individual element being sought. By contrast, 
incumbent LECs may not require as a ``same'' term or condition the new 
entrant's agreement to terms and conditions relating to other 
interconnection, services, or elements in the approved agreement. 
Moreover, incumbent LEC efforts to restrict availability of 
interconnection, services, or elements under section 252(i) also must 
comply with the 1996 Act's general nondiscrimination provisions. See 
Section VII.d.3.
    864. We further conclude that section 252(i) entitles all parties 
with interconnection agreements to ``most favored nation'' status 
regardless of whether they include ``most favored nation'' clauses in 
their agreements. Congress's command under section 252(i) was that 
parties may utilize any individual interconnection, service, or element 
in publicly filed interconnection agreements and incorporate it into 
the terms of their interconnection agreement. This means that any 
requesting carrier may avail itself of more advantageous terms and 
conditions subsequently negotiated by any other carrier for the same 
individual interconnection, service, or element once the subsequent 
agreement is filed with, and approved by, the state commission. We 
believe the approach we adopt will maximize competition by ensuring 
that carriers' obtain access to terms and elements on a 
nondiscriminatory basis.
    865. We find that section 252(i) permits differential treatment 
based on the LEC's cost of serving a carrier. We

[[Page 45603]]

further observe that section 252(d)(1) requires that unbundled element 
rates be cost-based, and sections 251(c)(2) and (c)(3) require 
incumbent LECs to provide only technically-feasible forms of 
interconnection and access to unbundled elements, while section 252(i) 
mandates that the availability of publicly-filed agreements be limited 
to carriers willing to accept the same terms and conditions as the 
carrier who negotiated the original agreement with the incumbent LEC. 
We conclude that these provisions, read together, require that 
publicly-filed agreements be made available only to carriers who cause 
the incumbent LEC to incur no greater costs than the carrier who 
originally negotiated the agreement, so as to result in an 
interconnection arrangement that is both cost-based and technically 
feasible. However, as discussed in Section VII regarding 
discrimination, where an incumbent LEC proposes to treat one carrier 
differently than another, the incumbent LEC must prove to the state 
commission that that differential treatment is justified based on the 
cost to the LEC of providing that element to the carrier.
    866. We conclude, however, that section 252(i) does not permit LECs 
to limit the availability of any individual interconnection, service, 
or network element only to those requesting carriers serving a 
comparable class of subscribers or providing the same service (i.e., 
local, access, or interexchange) as the original party to the 
agreement. In our view, the class of customers, or the type of service 
provided by a carrier, does not necessarily bear a direct relationship 
with the costs incurred by the LEC to interconnect with that carrier or 
on whether interconnection is technically feasible. Accordingly, we 
conclude that an interpretation of section 252(i) that attempts to 
limit availability by class of customer served or type of service 
provided would be at odds with the language and structure of the 
statute, which contains no such limitation.
    867. We agree with those commenters who suggest that agreements 
remain available for use by requesting carriers for a reasonable amount 
of time. Such a rule addresses incumbent LEC concerns over technical 
incompatibility, while at the same time providing requesting carriers 
with a reasonable time during which they may benefit from previously 
negotiated agreements. In addition, this approach makes economic sense, 
since the pricing and network configuration choices are likely to 
change over time, as several commenters have observed. Given this 
reality, it would not make sense to permit a subsequent carrier to 
impose an agreement or term upon an incumbent LEC if the technical 
requirements of implementing that agreement or term have changed.
    868. We observe that section 252(h) expressly provides that state 
commissions maintain for public inspection copies of interconnection 
agreements approved under section 252(e). We therefore decline Jones 
Intercable's suggestion that we require carriers to file agreements at 
the FCC, in addition to section 252(h)'s filing requirement. However, 
when the Commission performs the state's responsibilities under section 
252(e)(5), parties must file their agreements with the Commission, as 
well as with the state commission. We note section 22.903(d) of our 
rules, which remains in effect, requires the BOCs to file with us their 
interconnection agreements with their affiliated cellular providers. 47 
CFR Sec. 22.903(d).
    869. We further conclude that a carrier seeking interconnection, 
network elements, or services pursuant to section 252(i) need not make 
such requests pursuant to the procedures for initial section 251 
requests, but shall be permitted to obtain its statutory rights on an 
expedited basis. We find that this interpretation furthers Congress's 
stated goals of opening up local markets to competition and permitting 
interconnection on just, reasonable, and nondiscriminatory terms, and 
that we should adopt measures that ensure competition occurs as quickly 
and efficiently as possible. We conclude that the nondiscriminatory, 
pro-competition purpose of section 252(i) would be defeated were 
requesting carriers required to undergo a lengthy negotiation and 
approval process pursuant to section 251 before being able to utilize 
the terms of a previously approved agreement. Since agreements shall 
necessarily be filed with the states pursuant to section 252(h), we 
leave to state commissions in the first instance the details of the 
procedures for making agreements available to requesting carriers on an 
expedited basis. Because of the importance of section 252(i) in 
preventing discrimination, however, we conclude that carriers seeking 
remedies for alleged violations of section 252(i) shall be permitted to 
obtain expedited relief at the Commission, including the resolution of 
complaints under section 208 of the Communications Act, in addition to 
their state remedies.
    870. We conclude as well that agreements negotiated prior to 
enactment of the 1996 Act must be available for use by subsequent, 
requesting carriers. Section 252(i) must be read in conjunction with 
section 252(a)(1), which clearly states that ``agreement'' for purposes 
of section 252, ``includ[es] any interconnection agreement negotiated 
before the date of enactment * * *.'' We conclude that this language 
demonstrates that Congress intended 252(i) to apply to agreements 
negotiated prior to enactment of the 1996 Act and approved by the state 
commission pursuant to section 252(e), as well as those approved under 
the section 251/252 negotiation process. Accordingly, we find that 
agreements negotiated prior to enactment of the 1996 Act must be 
disclosed publicly, and be made available to requesting 
telecommunications carriers pursuant to section 252(i).
    871. We also find that section 252(i) applies to interconnection 
agreements between adjacent, incumbent LECs. We note that section 
252(i) requires a local exchange carrier to make available to 
requesting telecommunications carriers ``any interconnection service, 
or network element provided under an agreement approved under this 
section * * *.'' The plain meaning of this section is that any 
interconnection agreement approved by a state commission, including one 
between adjacent LECs, must be made available to requesting carriers 
pursuant to section 252(i). Requiring availability of such agreements 
will provide new entrants with a realistic benchmark upon which to base 
negotiations, and this will further the Congressional purpose of 
increasing competition. As stated in Section III of this Order, 
adjacent, incumbent LECs will be given an opportunity to renegotiate 
such agreements before they become subject to section 252(i)'s 
requirements. In Section III, we also consider, and reject, the Rural 
Tel. Coalition's argument that making agreements between adjacent, non-
competing LECs available under section 252 will have a detrimental 
effect on small, rural carriers. See Section III, supra.

XV. Final Regulatory Flexibility Analysis

    872. As required by Section 603 of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. Sec. 603, an Initial Regulatory Flexibility Analysis 
(IRFA) was incorporated in the NPRM. The Commission sought written 
public comment on the proposals in the NPRM. The Commission's Final 
Regulatory Flexibility Analysis (FRFA) in this Order conforms to the 
RFA, as amended by the Contract With America Advancement Act of 1996 
(CWAAA),

[[Page 45604]]

Public Law No. 104-121, 110 Stat. 847 (1996).

A. Need for and Objectives of This Report and Order and the Rules 
Adopted Herein

    873. The Commission, in compliance with section 251(d)(1) of the 
Communications Act of 1934, as amended by the Telecommunications Act of 
1996 (the 1996 Act), promulgates the rules in this Order to ensure the 
prompt implementation of sections 251 and 252 of the 1996 Act, which 
are the local competition provisions. Congress sought to establish 
through the 1996 Act ``a pro-competitive, de-regulatory national policy 
framework'' for the United States telecommunications industry. Three 
principal goals of the telephony provisions of the 1996 Act are: (1) 
opening local exchange and exchange access markets to competition; (2) 
promoting increased competition in telecommunications markets that are 
already open to competition, particularly long distance services 
markets; and, (3) reforming our system of universal service so that 
universal service is preserved and advanced as local exchange and 
exchange access markets move from monopoly to competition.
    874. The rules adopted in this Order implement the first of these 
goals--opening local exchange and exchange access markets to 
competition. The objective of the rules adopted in this Order is to 
implement as quickly and effectively as possible the national 
telecommunications policies embodied in the 1996 Act and to promote the 
development of competitive, deregulated markets envisioned by Congress. 
In doing so, we are mindful of the balance that Congress struck between 
this goal of bringing the benefits of competition to all consumers and 
its concern for the impact of the 1996 Act on small incumbent local 
exchange carriers, particularly rural carriers, as evidenced in section 
251(f) of the 1996 Act.

B. Analysis of Significant Issues Raised in Response to the IRFA

    875. Summary of the Initial Regulatory Flexibility Analysis (IRFA). 
In the NPRM, the Commission performed an IRFA. In the IRFA, the 
Commission found that the rules it proposed to adopt in this proceeding 
may have a significant impact on a substantial number of small business 
as defined by section 601(3) of the RFA. The Commission stated that its 
regulatory flexibility analysis was inapplicable to incumbent LECs 
because such entities are dominant in their field of operation. The 
Commission noted, however, that it would take appropriate steps to 
ensure that the special circumstances of smaller incumbent LECs are 
carefully considered in our rulemaking. The Commission also found that 
the proposed rules may overlap or conflict with the Commission's Part 
69 access charge and Expanded Interconnection rules. Finally, the IRFA 
solicited comment on alternatives to our proposed rules that would 
minimize the impact on small entities consistent with the objectives of 
this proceeding.
1. Treatment of Small LECs
    876. Discussion. In essence, SBA and Rural Tel. Coalition argue 
that we exceeded our authority under the RFA by certifying all 
incumbent LECs as dominant in their field of operation, and concluding 
on that basis that they are not small businesses under the RFA. SBA and 
Rural Tel. Coalition contend that the authority to make a size 
determination rests solely with SBA and that, by excluding a group 
(small incumbent LECs) from coverage under the RFA, the Commission made 
an unauthorized size determination. Neither SBA nor Rural Tel. 
Coalition cites any specific authority for this latter proposition.
    877. We have found incumbent LECs to be ``dominant in their field 
of operation'' since the early 1980's, and we consistently have 
certified under the RFA that incumbent LECs are not subject to 
regulatory flexibility analyses because they are not small businesses. 
We have made similar determinations in other areas. We recognize SBA's 
special role and expertise with regard to the RFA, and intend to 
continue to consult with SBA outside the context of this proceeding to 
ensure that the Commission is fully implementing the RFA. Although we 
are not fully persuaded on the basis of this record that our prior 
practice has been incorrect, in light of the special concerns raised by 
SBA and Rural Tel. Coalition in this proceeding, we will, nevertheless, 
include small incumbent LECs in this FRFA to remove any possible issue 
of RFA compliance. We, therefore, need not address Rural Tel. 
Coalition's arguments that incumbent LECs are not dominant.
2. Other Issues
    878. Discussion. We disagree with SBA's assessment of our IRFA. 
Although the IRFA referred only generally to the reporting and 
recordkeeping requirements imposed on incumbent LECs, our Federal 
Register notice set forth in detail the general reporting and 
recordkeeping requirements as part of our Paperwork Reduction Act 
statement. The IRFA also sought comment on the many alternatives 
discussed in the body of the NPRM, including the statutory exemption 
for certain rural telephone companies. The numerous general public 
comments concerning the impact of our proposal on small entities in 
response to the NPRM, including comments filed directly in response to 
the IRFA, enabled us to prepare this FRFA. Thus, we conclude that the 
IRFA was sufficiently detailed to enable parties to comment 
meaningfully on the proposed rules and, thus, for us to prepare this 
FRFA. We have been working with, and will continue to work with SBA, to 
ensure that both our IRFAs and FRFAs fully meet the requirements of the 
RFA.
    879. SBA also objects to the NPRM's requirement that responses to 
the IRFA be filed under a separate and distinct heading, and proposes 
that we integrate RFA comments into the body of general comments on a 
rule. Almost since the adoption of the RFA, we have requested that IRFA 
comments be submitted under a separate and distinct heading. Neither 
the RFA nor SBA's rules prescribe the manner in which comments may be 
submitted in response to an IRFA and, in such circumstances, it is well 
established that an administrative agency can structure its proceedings 
in any manner that it concludes will enable it to fulfill its statutory 
duties. Based on our past practice, we find that separation of comments 
responsive to the IRFA facilitates our preparation of a compulsory 
summary of such comments and our responses to them, as required by the 
RFA. Comments on the impact of our proposed rules on small entities 
have been integrated into our analysis and consideration of the final 
rules. We, therefore, reject SBA's argument that we improperly required 
commenters to include their comments on the IRFA in a separate section.
    880. We also reject SBA's assertion that none of the alternatives 
in the NPRM is designed to minimize the impact of the proposed rules on 
small businesses. For example, we proposed that incumbent LECs be 
required to offer competitors access to unbundled local loop, 
switching, and transport facilities. These proposals permit potential 
competitors to enter the market by relying, in part or entirely, on the 
incumbent LEC's facilities. Reduced economic entry barriers are 
designed to provide reasonable opportunities for new entrants, 
particularly small entities, to enter the market by minimizing the 
initial investment needed to begin providing service. In addition, we

[[Page 45605]]

believe section 251(f) and our rules provide states with significant 
flexibility to ``deal with the needs of individual companies in light 
of public interest concerns,'' as requested by the Idaho Commission. 
With regard to the potential burdens on small entities other than 
incumbent LECs, we believe our rules permit states to structure 
arbitration procedures, for example, in ways that minimize filing or 
other burdens on new entrants that are small entities.
    881. We also disagree with SCBA's assertion that the IRFA was 
deficient because it did not identify small cable operators as entities 
that would be affected by the proposed rules. The IRFA in the NPRM 
states: ``Insofar as the proposals in this Notice apply to 
telecommunications carriers other than incumbent LECs (generally 
interexchange carriers and new LEC entrants), they may have a 
significant impact on a substantial number of small entities.'' The 
phrase ``new LEC entrants'' clearly encompasses small cable operators 
that become providers of local exchange service. The NPRM even 
identifies cable operators as potential new entrants.
    882. We agree with SCBA's argument that the Commission should 
identify certain minimum standards to provide guidance on the 
requirement that parties negotiate in good faith. As discussed in 
Section III.B, we conclude that we should establish minimum standards 
that will offer parties guidance in determining whether they are acting 
in good faith. We believe that these minimum standards address SCBA's 
assertion that federal guidelines for good faith negotiations may be 
particularly important for small entities because unreasonable delays 
in negotiations could represent an entry barrier for small entities.
    883. We also agree with SCBA's recommendation that we should 
establish guidelines for the application of section 251(f) regarding 
exemptions, suspensions, and modifications of our rules governing 
interconnection with rural carriers. As discussed in section XII.B, we 
find that a rural incumbent LEC should not be able to obtain an 
exemption, suspension, or modification of its obligations under section 
251 unless it offers evidence that the application of those 
requirements would be likely to cause injury beyond the financial harm 
typically associated with efficient competitive entry. We are also 
persuaded by the suggestion of SCBA and others that incumbent LECs 
should bear the burden of showing that they should be exempt pursuant 
to section 251(f)(1) from national interconnection requirements. We 
believe that this finding is consistent with the pro-competitive goals 
of the 1996 Act and our determination in Section XII that Congress did 
not intend to withhold from consumers the benefits of local telephone 
competition that could be provided by small entities, such as small 
cable operators.
    884. We do not adopt SCBA's proposal to establish abbreviated 
arbitration procedures. Most commenters oppose adoption of federal 
rules to govern state mediation and arbitration proceedings. As set out 
in Section XIV.A, we conclude that state commissions are better 
positioned to develop rules for mediation and arbitration that support 
the objectives of the 1996 Act. The rules we adopt in Section XIV.A 
apply only where the Commission assumes a state commission's 
responsibilities pursuant to section 252(e)(5). States may develop 
specific measures that address the concerns of small entities 
participating in mediation or arbitration, as suggested by SCBA. In 
addition, although we do not specifically incorporate SCBA's request 
that the Commission designate a ``small company contact person at 
incumbent LECs and state commissions,'' we find that a refusal 
throughout the negotiation process to designate a representative with 
authority to make binding representations on behalf of the party, and 
thereby significantly delay resolution of issues, would constitute 
failure to negotiate in good faith. Therefore, we conclude that the 
potential benefits of SCBA's proposal are achieved by our determination 
that the failure of an incumbent LEC to designate a person authorized 
to bind his or her company in negotiations is a violation of the good 
faith obligation of section 251.

C. Description and Estimates of the Number of Small Entities Affected 
by this Report and Order

    885. For the purposes of this Order, the RFA defines a ``small 
business'' to be the same as a ``small business concern'' under the 
Small Business Act, 15 U.S.C. 632, unless the Commission has developed 
one or more definitions that are appropriate to its activities. Under 
the Small Business Act, a ``small business concern'' is one that: (1) 
Is independently owned and operated; (2) is not dominant in its field 
of operation; and (3) meets any additional criteria established by the 
Small Business Administration (SBA). SBA has defined businesses for 
Standard Industrial Classification (SIC) categories 4812 
(Radiotelephone Communications) and 4813 (Telephone Communications, 
Except Radiotelephone) to be small entities when they have fewer than 
1,500 employees. We first discuss generally the total number of small 
telephone companies falling within both of those SIC categories. Then, 
we discuss the number of small businesses within the two subcategories, 
and attempt to refine further those estimates to correspond with the 
categories of telephone companies that are commonly used under our 
rules.
    886. Consistent with our prior practice, we shall continue to 
exclude small incumbent LECs from the definition of a small entity for 
the purpose of this FRFA. Nevertheless, as mentioned above, we include 
small incumbent LECs in our FRFA. Accordingly, our use of the terms 
``small entities'' and ``small businesses'' does not encompass ``small 
incumbent LECs.'' We use the term ``small incumbent LECs'' to refer to 
any incumbent LECs that arguably might be defined by SBA as ``small 
business concerns.''
1. Telephone Companies (SIC 481)
    887. Total Number of Telephone Companies Affected. Many of the 
decisions and rules adopted herein may have a significant effect on a 
substantial number of the small telephone companies identified by SBA. 
The United States Bureau of the Census (``the Census Bureau'') reports 
that, at the end of 1992, there were 3,497 firms engaged in providing 
telephone services, as defined therein, for at least one year. This 
number contains a variety of different categories of carriers, 
including local exchange carriers, interexchange carriers, competitive 
access providers, cellular carriers, mobile service carriers, operator 
service providers, pay telephone operators, PCS providers, covered SMR 
providers, and resellers. It seems certain that some of those 3,497 
telephone service firms may not qualify as small entities or small 
incumbent LECs because they are not ``independently owned and 
operated.'' For example, a PCS provider that is affiliated with an 
interexchange carrier having more than 1,500 employees would not meet 
the definition of a small business. It seems reasonable to conclude, 
therefore, that fewer than 3,497 telephone service firms are small 
entity telephone service firms or small incumbent LECs that may be 
affected by this Order.
    888. Wireline Carriers and Service Providers. SBA has developed a 
definition of small entities for telephone communications companies 
other than radiotelephone (wireless) companies.

[[Page 45606]]

The Census Bureau reports that, there were 2,321 such telephone 
companies in operation for at least one year at the end of 1992. 
According to SBA's definition, a small business telephone company other 
than a radiotelephone company is one employing fewer than 1,500 
persons. All but 26 of the 2,321 non-radiotelephone companies listed by 
the Census Bureau were reported to have fewer than 1,000 employees. 
Thus, even if all 26 of those companies had more than 1,500 employees, 
there would still be 2,295 non-radiotelephone companies that might 
qualify as small entities or small incumbent LECs. Although it seems 
certain that some of these carriers are not independently owned and 
operated, we are unable at this time to estimate with greater precision 
the number of wireline carriers and service providers that would 
qualify as small business concerns under SBA's definition. 
Consequently, we estimate that there are fewer than 2,295 small entity 
telephone communications companies other than radiotelephone companies 
that may be affected by the decisions and rules adopted in this Order.
    889. Local Exchange Carriers. Neither the Commission nor SBA has 
developed a definition of small providers of local exchange services 
(LECs). The closest applicable definition under SBA rules is for 
telephone communications companies other than radiotelephone (wireless) 
companies. The most reliable source of information regarding the number 
of LECs nationwide of which we are aware appears to be the data that we 
collect annually in connection with the Telecommunications Relay 
Service (TRS). According to our most recent data, 1,347 companies 
reported that they were engaged in the provision of local exchange 
services. Although it seems certain that some of these carriers are not 
independently owned and operated, or have more than 1,500 employees, we 
are unable at this time to estimate with greater precision the number 
of LECs that would qualify as small business concerns under SBA's 
definition. Consequently, we estimate that there are fewer than 1,347 
small incumbent LECs that may be affected by the decisions and rules 
adopted in this Order.
    890. Interexchange Carriers. Neither the Commission nor SBA has 
developed a definition of small entities specifically applicable to 
providers of interexchange services (IXCs). The closest applicable 
definition under SBA rules is for telephone communications companies 
other than radiotelephone (wireless) companies. The most reliable 
source of information regarding the number of IXCs nationwide of which 
we are aware appears to be the data that we collect annually in 
connection with TRS. According to our most recent data, 97 companies 
reported that they were engaged in the provision of interexchange 
services. Although it seems certain that some of these carriers are not 
independently owned and operated, or have more than 1,500 employees, we 
are unable at this time to estimate with greater precision the number 
of IXCs that would qualify as small business concerns under SBA's 
definition. Consequently, we estimate that there are fewer than 97 
small entity IXCs that may be affected by the decisions and rules 
adopted in this Order.
    891. Competitive Access Providers. Neither the Commission nor SBA 
has developed a definition of small entities specifically applicable to 
providers of competitive access services (CAPs). The closest applicable 
definition under SBA rules is for telephone communications companies 
other than radiotelephone (wireless) companies. The most reliable 
source of information regarding the number of CAPs nationwide of which 
we are aware appears to be the data that we collect annually in 
connection with the TRS. According to our most recent data, 30 
companies reported that they were engaged in the provision of 
competitive access services. Although it seems certain that some of 
these carriers are not independently owned and operated, or have more 
than 1,500 employees, we are unable at this time to estimate with 
greater precision the number of CAPs that would qualify as small 
business concerns under SBA's definition. Consequently, we estimate 
that there are fewer than 30 small entity CAPs that may be affected by 
the decisions and rules adopted in this Order.
    892. Operator Service Providers. Neither the Commission nor SBA has 
developed a definition of small entities specifically applicable to 
providers of operator services. The closest applicable definition under 
SBA rules is for telephone communications companies other than 
radiotelephone (wireless) companies. The most reliable source of 
information regarding the number of operator service providers 
nationwide of which we are aware appears to be the data that we collect 
annually in connection with the TRS. According to our most recent data, 
29 companies reported that they were engaged in the provision of 
operator services. Although it seems certain that some of these 
companies are not independently owned and operated, or have more than 
1,500 employees, we are unable at this time to estimate with greater 
precision the number of operator service providers that would qualify 
as small business concerns under SBA's definition. Consequently, we 
estimate that there are fewer than 29 small entity operator service 
providers that may be affected by the decisions and rules adopted in 
this Order.
    893. Pay Telephone Operators. Neither the Commission nor SBA has 
developed a definition of small entities specifically applicable to pay 
telephone operators. The closest applicable definition under SBA rules 
is for telephone communications companies other than radiotelephone 
(wireless) companies. The most reliable source of information regarding 
the number of pay telephone operators nationwide of which we are aware 
appears to be the data that we collect annually in connection with the 
TRS. According to our most recent data, 197 companies reported that 
they were engaged in the provision of pay telephone services. Although 
it seems certain that some of these carriers are not independently 
owned and operated, or have more than 1,500 employees, we are unable at 
this time to estimate with greater precision the number of pay 
telephone operators that would qualify as small business concerns under 
SBA's definition. Consequently, we estimate that there are fewer than 
197 small entity pay telephone operators that may be affected by the 
decisions and rules adopted in this Order.
    894. Wireless (Radiotelephone) Carriers. SBA has developed a 
definition of small entities for radiotelephone (wireless) companies. 
The Census Bureau reports that there were 1,176 such companies in 
operation for at least one year at the end of 1992. According to SBA's 
definition, a small business radiotelephone company is one employing 
fewer than 1,500 persons. The Census Bureau also reported that 1,164 of 
those radiotelephone companies had fewer than 1,000 employees. Thus, 
even if all of the remaining 12 companies had more than 1,500 
employees, there would still be 1,164 radiotelephone companies that 
might qualify as small entities if they are independently owned or 
operated. Although it seems certain that some of these carriers are not 
independently owned and operated, we are unable at this time to 
estimate with greater precision the number of radiotelephone carriers 
and service providers that would qualify as small business concerns 
under SBA's definition. Consequently, we estimate that there are fewer 
than 1,164 small entity radiotelephone companies that may be

[[Page 45607]]

affected by the decisions and rules adopted in this Order.
    895. Cellular Service Carriers. Neither the Commission nor SBA has 
developed a definition of small entities specifically applicable to 
providers of cellular services. The closest applicable definition under 
SBA rules is for telephone communications companies other than 
radiotelephone (wireless) companies. The most reliable source of 
information regarding the number of cellular service carriers 
nationwide of which we are aware appears to be the data that we collect 
annually in connection with the TRS. According to our most recent data, 
789 companies reported that they were engaged in the provision of 
cellular services. Although it seems certain that some of these 
carriers are not independently owned and operated, or have more than 
1,500 employees, we are unable at this time to estimate with greater 
precision the number of cellular service carriers that would qualify as 
small business concerns under SBA's definition. Consequently, we 
estimate that there are fewer than 789 small entity cellular service 
carriers that may be affected by the decisions and rules adopted in 
this Order.
    896. Mobile Service Carriers. Neither the Commission nor SBA has 
developed a definition of small entities specifically applicable to 
mobile service carriers, such as paging companies. The closest 
applicable definition under SBA rules is for telephone communications 
companies other than radiotelephone (wireless) companies. The most 
reliable source of information regarding the number of mobile service 
carriers nationwide of which we are aware appears to be the data that 
we collect annually in connection with the TRS. According to our most 
recent data, 117 companies reported that they were engaged in the 
provision of mobile services. Although it seems certain that some of 
these carriers are not independently owned and operated, or have more 
than 1,500 employees, we are unable at this time to estimate with 
greater precision the number of mobile service carriers that would 
qualify under SBA's definition. Consequently, we estimate that there 
are fewer than 117 small entity mobile service carriers that may be 
affected by the decisions and rules adopted in this Order.
    897. Broadband PCS Licensees. The broadband PCS spectrum is divided 
into six frequency blocks designated A through F. As set forth in 47 
CFR Sec. 24.720(b), the Commission has defined ``small entity'' in the 
auctions for Blocks C and F as a firm that had average gross revenues 
of less than $40 million in the three previous calendar years. Our 
definition of a ``small entity'' in the context of broadband PCS 
auctions has been approved by SBA. The Commission has auctioned 
broadband PCS licenses in Blocks A, B, and C. We do not have sufficient 
data to determine how many small businesses bid successfully for 
licenses in Blocks A and B. There were 90 winning bidders that 
qualified as small entities in the Block C auction. Based on this 
information, we conclude that the number of broadband PCS licensees 
affected by the decisions in this Order includes, at a minimum, the 90 
winning bidders that qualified as small entities in the Block C 
broadband PCS auction.
    898. At present, no licenses have been awarded for Blocks D, E, and 
F of broadband PCS spectrum. Therefore, there are no small businesses 
currently providing these services. However, a total of 1,479 licenses 
will be awarded in the D, E, and F Block broadband PCS auctions, which 
are scheduled to begin on August 26, 1996. Eligibility for the 493 F 
Block licenses is limited to entrepreneurs with average gross revenues 
of less than $125 million. We cannot estimate, however, the number of 
these licenses that will be won by small entities under our definition, 
nor how many small entities will win D or E Block licenses. Given that 
nearly all radiotelephone companies have fewer than 1,000 employees and 
that no reliable estimate of the number of prospective D, E, and F 
Block licensees can be made, we assume for purposes of this FRFA, that 
all of the licenses in the D, E, and F Block Broadband PCS auctions may 
be awarded to small entities under our rules, which may be affected by 
the decisions and rules adopted in this Order.
    899. SMR Licensees. Pursuant to 47 CFR Sec. 90.814(b)(1), the 
Commission has defined ``small entity'' in auctions for geographic area 
800 MHz and 900 MHz SMR licenses as a firm that had average annual 
gross revenues of less than $15 million in the three previous calendar 
years. This definition of a ``small entity'' in the context of 800 MHz 
and 900 MHz SMR has been approved by the SBA. The rules adopted in this 
Order may apply to SMR providers in the 800 MHz and 900 MHz bands that 
either hold geographic area licenses or have obtained extended 
implementation authorizations. We do not know how many firms provide 
800 MHz or 900 MHz geographic area SMR service pursuant to extended 
implementation authorizations, nor how many of these providers have 
annual revenues of less than $15 million. We assume, for purposes of 
this FRFA, that all of the extended implementation authorizations may 
be held by small entities, which may be affected by the decisions and 
rules adopted in this Order.
    900. The Commission recently held auctions for geographic area 
licenses in the 900 MHz SMR band. There were 60 winning bidders who 
qualified as small entities in the 900 MHz auction. Based on this 
information, we conclude that the number of geographic area SMR 
licensees affected by the rule adopted in this Order includes these 60 
small entities. No auctions have been held for 800 MHz geographic area 
SMR licenses. Therefore, no small entities currently hold these 
licenses. A total of 525 licenses will be awarded for the upper 200 
channels in the 800 MHz geographic area SMR auction. However, the 
Commission has not yet determined how many licenses will be awarded for 
the lower 230 channels in the 800 MHz geographic area SMR auction. 
There is no basis, moreover, on which to estimate how many small 
entities will win these licenses. Given that nearly all radiotelephone 
companies have fewer than 1,000 employees and that no reliable estimate 
of the number of prospective 800 MHz licensees can be made, we assume, 
for purposes of this FRFA, that all of the licenses may be awarded to 
small entities who, thus, may be affected by the decisions in this 
Order.
    901. Resellers. Neither the Commission nor SBA has developed a 
definition of small entities specifically applicable to resellers. The 
closest applicable definition under SBA rules is for all telephone 
communications companies. The most reliable source of information 
regarding the number of resellers nationwide of which we are aware 
appears to be the data that we collect annually in connection with the 
TRS. According to our most recent data, 206 companies reported that 
they were engaged in the resale of telephone services. Although it 
seems certain that some of these carriers are not independently owned 
and operated, or have more than 1,500 employees, we are unable at this 
time to estimate with greater precision the number of resellers that 
would qualify as small business concerns under SBA's definition. 
Consequently, we estimate that there are fewer than 206 small entity 
resellers that may be affected by the decisions and rules adopted in 
this Order.
2. Cable System Operators (SIC 4841)
    902. SBA has developed a definition of small entities for cable and 
other pay television services, which includes all such companies 
generating less than

[[Page 45608]]

$10 million in revenue annually. This definition includes cable systems 
operators, closed circuit television services, direct broadcast 
satellite services, multipoint distribution systems, satellite master 
antenna systems and subscription television services. According to the 
Census Bureau, there were 1,323 such cable and other pay television 
services generating less than $11 million in revenue that were in 
operation for at least one year at the end of 1992.
    903. The Commission has developed its own definition of a small 
cable system operator for the purposes of rate regulation. Under the 
Commission's rules, a ``small cable company'' is one serving fewer than 
400,000 subscribers nationwide. The Commission developed this 
definition based on its determination that a small cable system 
operator is one with annual revenues of $100 million or less. 
Implementation of Sections of the 1992 Cable Act: Rate Regulation, 
Sixth Report and Order and Eleventh Order on Reconsideration, 60 FR 
544919 (September 15, 1995). Based on our most recent information, we 
estimate that there were 1,439 cable operators that qualified as small 
cable system operators at the end of 1995. Since then, some of those 
companies may have grown to serve over 400,000 subscribers, and others 
may have been involved in transactions that caused them to be combined 
with other cable operators. Consequently, we estimate that there are 
fewer than 1,468 small entity cable system operators that may be 
affected by the decisions and rules adopted in this Order.
    904. The Communications Act also contains a definition of a small 
cable system operator, which is ``a cable operator that, directly or 
through an affiliate, serves in the aggregate fewer than 1 percent of 
all subscribers in the United States and is not affiliated with any 
entity or entities whose gross annual revenues in the aggregate exceed 
$250,000,000.'' There were 63,196,310 basic cable subscribers at the 
end of 1995, and 1,450 cable system operators serving fewer than one 
percent (631,960) of subscribers. Although it seems certain that some 
of these cable system operators are affiliated with entities whose 
gross annual revenues exceed $250,000,000, we are unable at this time 
to estimate with greater precision the number of cable system operators 
that would qualify as small cable operators under the definition in the 
Communications Act.

D. Summary Analysis of the Projected Reporting, Recordkeeping, and 
Other Compliance Requirements and Steps Taken to Minimize the 
Significant Economic Impact of this Report and Order on Small Entities 
and Small Incumbent LECs, Including the Significant Alternatives 
Considered and Rejected

    905. Structure of the Analysis. In this section of the FRFA, we 
analyze the projected reporting, recordkeeping, and other compliance 
requirements that may apply to small entities and small incumbent LECs 
as a result of this Order. As a part of this discussion, we mention 
some of the types of skills that will be needed to meet the new 
requirements. We also describe the steps taken to minimize the economic 
impact of our decisions on small entities and small incumbent LECs, 
including the significant alternatives considered and rejected. Due to 
the size of this Order, we set forth our analysis separately for 
individual sections of the item, using the same headings as were used 
above in the corresponding sections of the Order.
    906. We provide this summary analysis to provide context for our 
analysis in this FRFA. To the extent that any statement contained in 
this FRFA is perceived as creating ambiguity with respect to our rules 
or statements made in preceding sections of this Order, the rules and 
statements set forth in those preceding sections shall be controlling.
Summary Analysis of Section II--Scope of the Commission's Rules
    907. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. As discussed in Section II.E, a common 
carrier, which may be a small entity or a small incumbent LEC, may be 
subject to an action for relief in several different fora if a party 
believes that small entity or incumbent LEC violated the standards 
under section 251 or 252. Should a small entity or a small incumbent 
LEC be subjected to such an action for relief, it will require the use 
of legal skills.
    908. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. We 
believe that our actions establishing minimum national rules will 
facilitate the development of competition in the local exchange and 
exchange access markets for the reasons discussed in Sections II.A and 
II.B above. For example, national rules may: help equalize bargaining 
power; minimize the need for duplicative marketing strategies and 
multiple network configurations; lower administrative costs; lessen the 
need to re-litigate the same issue in multiple jurisdictions; and 
reduce delay and transaction costs, which can pose particular burdens 
for small businesses. In addition, our rules are designed to 
accommodate differences among regions and carriers, and the reduced 
regulatory burdens and increased certainty produced by national rules 
may be expected to minimize the economic impact of our decisions for 
all parties, including any small entities and small incumbent LECs. As 
set forth in Section II.A above, we reject suggestions to adopt more, 
or fewer, national rules than we ultimately adopt in this Order. We 
reject the arguments that we should establish ``preferred outcomes'' 
from which parties could deviate upon an adequate showing, or that we 
establish a process by which state commissions could seek a waiver from 
the Commission's rules, for the reasons set forth in Section II.B 
above.
    909. We believe that our determination that there are multiple 
methods for bringing enforcement actions against parties regarding 
their obligations under sections 251 and 252 will assist all parties, 
including small entities and small incumbent LECs, by providing a 
variety of methods and fora for seeking enforcement of such 
obligations. (Section II.E--Authority to Take Enforcement Action.) 
Similarly, our conclusion that Bell Operating Company (BOC) statements 
of generally available terms and conditions are governed by the same 
national rules that apply to agreements arbitrated under section 252 
should ease administrative burdens for all parties in markets served by 
BOCs, which may include small entities, because they will not need to 
evaluate and comply with different sets of rules. (Section II.F--BOC 
Statements of Generally Available Terms.) Finally, we decline to adopt 
different requirements for agreements arbitrated under section 252 and 
BOC statements of generally available terms and conditions for the 
reasons set forth in section II.F above.
Summary Analysis of Section III--Duty To Negotiate in Good Faith
    910. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. Incumbent LECs, including small incumbent LECs 
that receive requests for access to network elements and/or services 
pursuant to sections 251 and 252 of the Act will be required to 
negotiate in good faith over the terms of interconnection agreements. 
As set forth in section III.C, above, this Order identifies several 
practices as violations of the duty to

[[Page 45609]]

negotiate in good faith, including: (1) a party's seeking or entering 
into an agreement prohibiting disclosure of information requested by 
the FCC or a state commission, or supplied in support of a request for 
arbitration pursuant to section 252(b)(2)(B); (2) seeking or entering 
into an agreement precluding amendment of the agreement to account for 
changes in federal or state rules; (3) an incumbent's denial of a 
reasonable request for cost data during negotiations; and (4) an 
entrant's failure to provide to the incumbent LEC information necessary 
to reach agreement. Complying with the projected requirements of this 
section may require the use of legal skills. In addition, incumbent 
LECs and new entrants having interconnection agreements that predate 
the 1996 Act must file such agreements with the state commission for 
approval under section 252(e), as discussed above in section III.D.
    911. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. As set 
forth above, we believe our decision to establish national rules and a 
review process concerning parties' duties to negotiate in good faith 
are designed to facilitate good faith negotiations, which should 
minimize regulatory burdens and the economic impact of our decisions 
for all parties, including small entities and small incumbent LECs. 
(Section III.B--Advantages and Disadvantages of National Rules.) We 
also expect economic impacts to be minimized for small entities seeking 
to enter into agreements with incumbent LECs as a result of the 
decision that incumbent LECs may not impose a bona fide request 
requirement on carriers seeking agreements pursuant to sections 251 and 
252. (Section III.C--Specific Practices that may Constitute a Violation 
of Good Faith Negotiation.) For the reasons set forth in Section III.C 
above, we also find that certain additional practices are not always 
violations of the duty to negotiate in good faith, including the 
suggested alternative that all nondisclosure agreements violate the 
good faith duty.
    912. We do not require immediate filing of preexisting 
interconnection agreements, including those involving small incumbent 
LECs and small entities. We set an outer time limit of June 30, 1997, 
by which preexisting agreements between Class A carriers must be filed 
with the relevant state commission. This decision will ensure that 
third parties, including small entities, are not prevented indefinitely 
from reviewing and taking advantage of the terms of preexisting 
agreements. It also limits burdens that a national filing deadline 
might impose on small carriers. In addition, the determination that 
preexisting agreements must be filed with state commissions seems 
likely to foster opportunities for small entities and small incumbent 
LECs to gain access to such agreements without requiring investigation 
or discovery proceedings or other administrative burdens that could 
increase regulatory burdens. (Section III.C--Applicability of Section 
252 to Preexisting Agreements). For the reasons set forth in Section 
III.C above, we reject the alternative of not requiring certain 
agreements to be filed with state commissions.
Summary Analysis of Section IV--Interconnection
    913. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. Incumbent LECs, including small incumbent 
LECs, are required by section 251(c) to provide interconnection to all 
requesting telecommunications carriers for the transmission and routing 
of telephone exchange service and exchange access service. Such 
interconnection must be: (1) provided at any technically feasible 
point; (2) at least equal in quality to that provided to the incumbent 
LEC itself and to any other parties with interconnection agreements; 
and (3) provided on rates, terms, and conditions that are ``just, 
reasonable, and nondiscriminatory * * *.'' We conclude that 
interconnection refers solely to the physical linking of networks for 
the mutual exchange of traffic, and identify a minimum set of 
technically feasible points of interconnection. The minimum points at 
which an incumbent LEC, which may be a small incumbent LEC, must 
provide interconnection are: (1) the line side of a local switch; (2) 
the trunk side of a local switch; (3) the trunk interconnection points 
for a tandem switch; (4) central office cross-connect points; and (5) 
out-of-band signaling facilities. In addition, the points of access to 
unbundled elements (discussed below) are also technically feasible 
points of interconnection. Compliance with these requests may require 
the use of engineering, technical, operational, accounting, billing, 
and legal skills.
    914. To obtain interconnection pursuant to section 251(c)(2), 
telecommunications carriers must seek interconnection for the purpose 
of transmitting and routing telephone exchange traffic, or exchange 
access traffic, or both. (Section IV.D.--Definition of ``Technically 
Feasible.'') This will require new entrants to provide either local 
exchange service or exchange access service to obtain section 251(c)(2) 
interconnection. A requesting carrier will be required to bear the 
additional costs imposed on incumbent LECs as a result of 
interconnection. (Section IV.E.--Technically Feasible Points of 
Interconnection.) Carriers seeking interconnection, including small 
entities, may be required to collect information to refute claims by 
incumbent LECs that the requested interconnection poses a legitimate 
threat to network reliability. (Id.)
    915. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. The 
decision to adopt clear national rules in this section of the Order is 
also intended to help equalize bargaining power between incumbent LECs 
and requesting carriers, expedite and simplify negotiations, and 
facilitate comprehensive business and network planning. This could 
decrease entry barriers and provide reasonable opportunities for all 
carriers, including small entities and small incumbent LECs, to provide 
service in markets for local exchange and exchange access services. 
(Section IV.B.--National Interconnection Rules). National rules should 
also facilitate the consistent development of standards and resolution 
of issues, such as technical feasibility, without imposing additional 
litigation costs on parties, including small entities and small 
incumbent LECs. We determine that successful interconnection at a 
particular point in a network creates a rebuttable presumption that 
interconnection is technically feasible at other comparable points in 
the network. (Section IV.E--Definition of ``Technically Feasible.'') We 
also identify minimum points of interconnection where interconnection 
is presumptively technically feasible: (1) the line side of a switch; 
(2) the trunk side of a switch; (3) trunk interconnection points at a 
tandem switch; (4) central office cross-connect points; and (5) out-of-
band signaling facilities. (Section IV.F--Technically Feasible Points 
of Interconnection.) These decisions may be expected to facilitate 
negotiations by promoting certainty and reducing transaction costs, 
which should minimize regulatory burdens and the economic impact of our 
decisions for all parties, including small entities and small incumbent 
LECs. We decline, however, to identify additional points where 
interconnection is technically feasible for the reasons set forth in 
section IV.F above.

[[Page 45610]]

    916. The ability to enter local markets by offering only telephone 
exchange service or only exchange access service may minimize 
regulatory burdens and the economic impact of our decisions for some 
entrants, including small entities. We decline, however, to interpret 
section 251(c)(2) as requiring incumbent LECs to provide 
interconnection to carriers seeking to offer only interexchange 
services for the reasons set forth in section IV.C above. In addition, 
we determine that an incumbent LEC may refuse to interconnect on the 
grounds that specific, significant, and demonstrable network 
reliability concerns may make interconnection at a particular point 
sufficiently infeasible. We further determine that the incumbent LEC 
must prove such infeasibility to the state commission. (Section IV.E. 
Definition of ``Technically Feasible.'')
    917. Competitive carriers, many of whom may be small entities, will 
be permitted to request interconnection at any technically feasible 
point, and the determination of feasibility must be conducted without 
consideration of the cost of providing interconnection at a particular 
point. (Section IV.D.--Definition of ``Technically Feasible.'') 
Consequently, our rules permit the party requesting interconnection, 
which may be a small entity, and not the incumbent LEC to decide the 
points that are necessary to compete effectively. (Section IV.E.--
Definition of ``Technically Feasible.'') We decline, however, to impose 
reciprocal terms and conditions for interconnection on carriers 
requesting interconnection. Our decision that a party requesting 
interconnection must pay the costs of interconnecting should minimize 
regulatory burdens and the economic impact of our interconnection 
decisions for small incumbent LECs. Similarly, regulatory burdens and 
the economic impact of our decisions may be minimized through the 
decision that, while a requesting party is permitted to obtain 
interconnection that is of higher quality than that which the incumbent 
LEC provides to itself, the requesting party must pay the additional 
costs of receiving the higher quality interconnection. (Section IV.H.--
Interconnection that is Equal in Quality.)
Summary Analysis of Section V--Access to Unbundled Network Elements
    918. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. Under section 251(c), incumbent LECs are 
required to provide nondiscriminatory access to unbundled network 
elements. We identify a minimum set of network elements: (1) local 
loops; (2) local and tandem switches; (3) interoffice transmission 
facilities; (4) network interface devices; (5) signaling and call-
related database facilities; (6) operations support systems and 
functions; and (7) operator and directory assistance facilities. 
(Section V.J.--Specific Unbundling Requirements.) Incumbent LECs are 
required to provide nondiscriminatory access to operations support 
systems and information by January 1, 1997. States may require 
incumbent LECs to provide additional network elements on an unbundled 
basis. As discussed in Section V.F., above, LECs must perform the 
functions necessary to combine unbundled elements in a manner that 
allows requesting carriers to offer a telecommunications service, and 
the incumbent LEC may not impose restrictions on the subsequent use of 
network elements. Compliance with these requests may require the use of 
engineering, technical, operational, accounting, billing, and legal 
skills.
    919. If a requesting carrier, which may be a small entity, seeks 
access to an incumbent LEC's unbundled elements, the requesting carrier 
is required to compensate the incumbent LEC for any costs incurred to 
provide such access. For example, in the case of operation support 
systems functions, such work may include the development of interfaces 
for competing carriers to access incumbent LEC functions for pre-
ordering, ordering, provisioning, maintenance and repair, and billing. 
Requesting carriers may also have to deploy their own operations 
support systems interfaces, including electronic interfaces, in order 
to access the incumbent LEC's operations support systems functions. The 
development of interfaces may require new entrants, including small 
entities, to perform engineering work. (Section V.J.5--Operations 
Support Systems Unbundling.)
    920. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. The 
establishment of minimum national requirements for unbundled elements 
should facilitate negotiations and reduce regulatory burdens and 
uncertainty for all parties, including small entities and small 
incumbent LECs. National requirements for unbundling may allow new 
entrants, including small entities, to take advantage of economies of 
scale in network design, which may minimize the economic impact of our 
decision. As set forth in Section V.B, above, we reject several 
alternatives in making this determination, including proposals 
suggesting that the Commission should: (1) not identify any required 
elements; (2) allow the states exclusively to identify required 
elements; or (3) adopt an exhaustive list of elements.
    921. As set forth above, the 1996 Act defines a network element to 
include ``all facilit(ies) or equipment used in the provision of a 
telecommunications service,'' and all ``features, functions, and 
capabilities that are provided by means of such facility or equipment, 
including subscriber numbers, databases, signaling systems and 
information sufficient for billing and collection or used in the 
transmission, routing or other provision of a telecommunications 
service.'' (Section V.C--Network Elements.) As a result, new entrants, 
which may include small entities, should have access to the same 
technologies and economies of scale and scope that are available to 
incumbent LECs. In reaching our determination, we reject for the 
reasons set forth in Section V.C above, the following alternatives: (1) 
that we should not adopt a method for identifying elements beyond those 
identified in the 1996 Act; and (2) that features sold directly to end 
users as retail services are not network elements. Finally, we reject 
the argument that requesting carriers, which may include small 
entities, are required to provide all services typically furnished by 
means of an element they purchase. (Id.) Our rejection of this last 
alternative may reduce burdens for some small entities by permitting 
them to offer some, but not all, of the services provided by the 
incumbent LEC.
    922. We conclude that the requirement to provide ``access'' to 
unbundled network elements is independent of the interconnection duty 
imposed by section 251(c)(2), and that such ``access'' must be 
provisioned under the rates, terms and conditions applicable to 
unbundled network elements. We believe these conclusions may provide 
small entities seeking to compete with incumbent LECs with the 
flexibility to offer other telecommunications services in addition to 
local exchange and exchange access services. (Section V.D.--Access to 
Network Elements.) For the reasons set forth above in Section V.D, we 
reject the argument that incumbent LECs are not required to provide 
access to an element's functionality, and that ``access'' to unbundled 
elements can only be achieved by interconnecting under the terms of 
section 251(c)(2).
    923. As set forth above, we conclude that an incumbent LEC, which 
may be a small incumbent LEC, may decline to provide a network element 
beyond

[[Page 45611]]

those identified by the Commission where it can demonstrate that the 
network element is proprietary, and that the competing provider could 
offer the proposed telecommunications service using other 
nonproprietary elements within the incumbent's network. (Section V.E--
Standards Necessary to Identify Unbundled Network Elements.) This 
should minimize regulatory burdens and the economic impact of our 
decisions for incumbent LECs, including small incumbent LECs, by 
permitting such entities to retain exclusive use of certain proprietary 
network elements.
    924. We conclude that incumbent LECs: (1) cannot impose 
restrictions, requirements or limitations on requests for, or the sale 
or use of, unbundled network elements; (2) must provide requesting 
carriers with all of the functionalities of a particular element so 
that requesting carriers can provide any telecommunications services 
that can be offered by means of that element; (3) must permit new 
entrants to combine network elements which new entrants purchase access 
to, if so requested; (4) must prove to a state commission that they 
cannot combine elements that are not ordinarily combined within their 
network, or that are not ordinarily combined in that manner, because 
such combination is not technically feasible or it would impair the 
ability of other carriers to access unbundled elements and interconnect 
with the incumbent LEC; and (5) must provide the operational and 
support systems necessary to purchase and combine network elements. As 
a result of these conclusions, many small entities should face 
significantly reduced barriers to entry in markets for local exchange 
services. (Section V.F--Provision of a Telecommunications Service Using 
Unbundled Elements.) For the reasons set forth in section V.F, we 
reject the following alternatives: (1) that incumbent LECs, in all 
instances, must combine elements that are not ordinarily combined in 
their networks; and (2) that incumbent LECs are not obligated to 
combine elements for requesting carriers.
    925. By establishing minimum national rules concerning 
nondiscriminatory access to unbundled network elements, requesting 
carriers, including small entities, may face reduced transaction and 
regulatory costs in seeking to enter local telecommunications markets. 
Among these minimum rules are: (1) access and elements which new 
entrants receive are to be equal in quality between carriers; (2) 
incumbent LECs must prove technical infeasibility; (3) the rates, terms 
and conditions established for the provisioning of unbundled elements 
must be equal between all carriers, and where applicable, between 
requesting carriers and the incumbent LEC itself, and they must provide 
efficient competitors with a meaningful opportunity to compete; and (4) 
incumbent LECs must provide carriers purchasing unbundled elements with 
access to electronic interfaces if incumbents use such functions 
themselves in provisioning telecommunications services. (Section V.G--
Nondiscriminatory Access to Unbundled Network Elements.)
    926. As set forth above, we conclude that section 251(c)(3) does 
not require new entrants to own or control their own local exchange 
facilities in order to purchase and use unbundled network elements and, 
thus, new entrants can provide services solely by recombining unbundled 
network elements. (Section V.H--The Relationship Between Sections 
251(c)(3) and 251(c)(4).)
    927. As discussed in Section V.J above, we adopt a minimum list of 
required unbundled network elements that incumbent LECs, including 
small incumbent LECs, must make available to requesting carriers. In 
adopting this list, we sought to minimize the regulatory burdens and 
economic impact for small incumbent LECs. For example, we declined to 
adopt a detailed list including many additional elements, as set forth 
in Section V.B. We also provided for the fact that certain LECs may 
possess switches that are incapable of performing customized routing 
for competitors, as discussed in Section V.J.2.(c).(ii).
Summary Analysis of Section VI--Methods of Obtaining Interconnection 
and Access to Unbundled Network Elements
    928. Summary of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. We conclude that Section 251(c)(6) requires 
incumbent LECs, including small incumbent LECs, to provide for any 
technically feasible method of interconnection or access to unbundled 
network elements, including physical collocation, virtual collocation, 
and meet-point interconnection. With certain modifications, we adopt 
some of the requirements concerning physical and virtual collocation 
that we adopted in the Expanded Interconnection proceeding. Compliance 
with these requests may require the use of engineering, technical, 
operational, accounting, billing, and legal skills.
    929. In a meet-point arrangement the new entrant will build out 
facilities to the agreed-upon point, which will likely entail the use 
of engineering and installation personnel as well as the acquisition of 
equipment. We allow incumbent LECs to impose reasonable restrictions on 
the warehousing of space by collocators. Therefore, small entities 
collocating equipment may be required to use the provided space for the 
collocation of equipment necessary for interconnection or access to 
unbundled network elements or risk losing the right to use that space. 
(Section VI.B.1.e--Allocation of Space.) To take advantage of its right 
to collocate equipment on an incumbent LEC's premises, competitive 
entrants, which may include small entities, will be required to build 
or lease transmission facilities between their own equipment, located 
outside of the incumbent LECs' premises, and the collocated space. 
(Section VI.B.1.f--Leasing Transport Facilities.) We allow incumbent 
LECs to require reasonable security arrangements to separate an 
entrant's collocation space from the incumbent LEC's facilities. Small 
entities collocating equipment may therefore be required to pay for 
such security arrangements. (Section VI.B.1.h--Security Arrangements.)
    930. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. By 
readopting our Expanded Interconnection terms and conditions, which 
allow competitors to collocate equipment for interconnection with the 
incumbent LEC, regulatory burdens have likely been reduced because the 
terms and conditions for collocation have already been established. 
(Section VI.B.1.b--Readoption of Expanded Interconnection Terms and 
Conditions.) This seems likely to benefit all parties, including small 
entities and small incumbent LECs, since it should reduce the time and 
expense of negotiation, and reduce the costs of adapting to new terms 
and conditions for collocation.
    931. Due to our conclusion that requesting carriers may choose any 
method of technically feasible interconnection or access to unbundled 
elements, new entrants, including small entities, should have the 
flexibility to obtain interconnection or access in the manner that best 
suits their needs. (Section VI.A.--Methods of Obtaining Interconnection 
and Access to Unbundled Elements.) In particular, as discussed in 
Section VI.A.3, we recognize that carriers, including small entities, 
may find virtual collocation or meet-point arrangements more efficient 
than physical collocation in certain circumstances, particularly if 
they lack the resources to collocate physically in

[[Page 45612]]

a large number of incumbent LEC premises.
    932. We adopt a broad definition of the term ``premises,'' which 
should allow carriers, including small entities, to collocate equipment 
for interconnection and access to unbundled network elements at a range 
of incumbent LEC locations. (Section VI.B.1.c--The Meaning of the Term 
``Premises.'') For the reasons set forth in Section VI.B above, we 
interpret the term ``premises'' broadly to include incumbent LEC 
central offices, serving wire centers and tandem offices, as well as 
all buildings or similar structures owned or leased by the incumbent 
LEC that house incumbent LEC facilities. However, as set forth above, 
we reject the suggestion that security measures be provided only at the 
request of the entrant, which should minimize regulatory burdens and 
the economic impact of our decisions for small incumbent LECs. (Id.)
    933. We interpret the statute broadly to allow collocation of any 
equipment used for interconnection or access to unbundled network 
elements. (Section VI.B.1.d--Collocation Equipment.) This standard 
should offer all competitors, including small entities, flexibility in 
collocating equipment they need to interconnect their networks to those 
of incumbent LECs. Incumbent LECs will also be required to make space 
available to requesting carriers on a first-come, first-served basis, 
and collocators seeking to expand their collocated space should be 
allowed to use contiguous space where available. (Section VI.B.1.e--
Allocation of Space.) These provisions should minimize regulatory 
burdens and economic impacts for small entity entrants by reducing 
opportunities for discriminatory treatment based on the size of the 
requesting carrier. We decline, however, to require incumbent LECs to 
file reports on the status, planned increase, and use of space for the 
reasons set forth in Section VI.B.1. above, which will reduce the 
regulatory burdens and economic impact of our decisions for small 
incumbent LECs.
    934. We conclude that a competitive entrant should be permitted to 
lease transmission facilities from the incumbent LEC. (Section 
VI.B.1.f--Leasing Transport Facilities). This provision will allow 
small entities to lease transmission facilities from incumbent LECs to 
transmit traffic between the collocated space and their own networks, 
which may be comparatively less burdensome for small entities than the 
alternative of bringing their own facilities to the collocated 
equipment on the incumbent LEC's premises. We also require incumbent 
LECs to permit two or more carriers that are collocating at the 
incumbent LEC's premises to interconnect their networks. (Section 
VI.B.1.g--Co-Carrier Cross-Connect.) This requirement should make it 
easier for new entrants to interconnect their networks with those of 
competitors.
    935. We require incumbent LECs to provide the relevant state 
commissions with detailed floor plans or diagrams of any premises where 
the incumbent LEC alleges that there are space constraints. (Section 
VI.B.1.i.--Allowing Virtual Collocation in Lieu of Physical). This 
requirement may reduce burdens for all parties, including small 
entities and small incumbent LECs, by aiding state commissions with 
their evaluation of incumbent LEC refusals to allow physical 
collocation on the grounds of space constraints. For the reasons set 
forth in Section VI.B.1 above, however, we decline to require incumbent 
LECs to lease additional space or provide trunking at no cost where 
they have insufficient space for physical collocation, which should 
minimize the regulatory burdens and economic impact of our decisions 
for incumbent LECs, including small incumbent LECs.
Summary Analysis of Section VII--Pricing of Interconnection and 
Unbundled Network Elements
    936. Summary of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. Pursuant to sections 251(c) and 252(d) of the 
1996 Act, incumbent LECs must provide interconnection and access to 
unbundled network elements on rates, terms, and conditions that are 
just, reasonable, and nondiscriminatory. In Section VII above, we adopt 
a methodology for setting arbitrated prices for interconnection and 
unbundled elements on the basis of forward-looking economic cost 
studies prepared in conformance with a methodology prescribed by the 
Commission. Until states utilize economic studies to develop cost-based 
prices, they must use default proxies established by the Commission. 
Small incumbent LECs may be required, therefore, to prepare economic 
cost studies. In addition, small entities seeking arbitration for rates 
for interconnection or unbundled elements may find it useful to prepare 
economic cost studies or prepare critiques of cost studies prepared by 
incumbent LECs and others. In both cases, this may entail the use of 
economic experts, legal advice, and possibly accounting personnel.
    937. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. Our 
conclusion that prices for interconnection and unbundled elements 
should be set at forward-looking long-run economic cost, including a 
reasonable share of forward-looking joint and common costs, should 
permit new entrants, including small entities, to interconnect with, 
and acquire unbundled elements from, incumbent LECs at prices that 
replicate, to the extent possible, those in a competitive market. 
(Section VII.B.2--Pricing of Interconnection and Unbundled Elements, 
Cost-Based Pricing Methodology, Rate Levels.) Our forward-looking 
economic cost methodology for determining prices is designed to permit 
incumbent LECs to recover their economic costs of providing 
interconnection and unbundled elements, which should minimize the 
economic impact of our decisions on small incumbent LECs.
    938. Our conclusion that embedded costs, opportunity costs and 
universal service subsidies may not be included in the rates for 
interconnection and unbundled elements is intended, in part, to avoid 
distortions in investment decisions, which should lead to more 
efficient allocation of resources, thereby reducing regulatory burdens 
and economic impacts for some small entities and small incumbent LECs. 
(Section VII.B.2--Pricing of Interconnection and Unbundled Elements, 
Cost-Based Pricing Methodology, Rate Levels.) We reject proposals that 
would have permitted incumbent LECs to recover their embedded costs in 
prices for interconnection and unbundled elements as discussed above in 
Section VII.B.2.a.(3)(b). As discussed in Section VII.B.2.a.(3)(b), we 
reject the use of the efficient component pricing rule (ECPR) to set 
prices for interconnection and unbundled elements.
    939. Our conclusion that forward-looking common costs should be 
allocated in a reasonable manner should ensure that the prices of 
network elements that are least likely to be subject to competition are 
not artificially inflated by large allocations of common costs. This, 
in turn, may also produce more efficient allocations of resources, 
thereby minimizing regulatory burdens and economic effects for many 
parties, including small entities and small incumbent LECs. (Section 
VII.B.2--Pricing of Interconnection and Unbundled Elements, Cost-Based 
Pricing Methodology, Rate Levels.) We permit, but do not require, 
states to impose peak-sensitive pricing systems for

[[Page 45613]]

shared facilities as discussed in Section VII.B.3.b.
    940. We conclude that incumbent LECs should not recover access 
charges from entrants that use unbundled network facilities to provide 
access services to customers that they win from incumbent LECs. We do, 
however, permit incumbent LECs to impose on purchasers of unbundled 
local switching the carrier common line charge and a charge equal to 
seventy-five percent of the transport interconnection charge for an 
interim period that shall end no later than June 30, 1997, as discussed 
in Section VII.B.2.a.(3)(b). As further explained in that section, this 
mechanism should serve to reduce any short-term disruptive impact of 
our decisions on incumbent LECs, including small incumbent LECs.
    941. We conclude that the Act requires rates for interconnection 
and unbundled elements to be geographically deaveraged, using a minimum 
of three geographic zones, in a manner that appropriately reflects the 
costs of the underlying elements. (Section VII.B.3.c--Geographic/Class-
of-Service Averaging.) We also conclude that distinctions between the 
rates charged to requesting carriers for network elements should not 
vary based on the classes of service that the requesting carriers 
provide to their customers. We expect these decisions to lead to 
increased competition and a more efficient allocation of resources.
    942. The default proxies we adopt for rates for interconnection and 
unbundled elements, which states may use to establish prices, are 
designed to approximate prices that will enable efficient competitors, 
including small entities, to enter local exchange markets. (Section 
VII.C.--Default Proxy Ceilings and Ranges.) We reject the use of rates 
in interconnection agreements that predate the 1996 Act as proxy-based 
ceilings for interconnection and unbundled element rates as discussed 
in Section VII.C.1. We also decline to adopt a generic cost model at 
this time, as discussed in Section VII.C.3.
    943. We determine that the nondiscrimination provisions in the Act 
prohibit price differences that are not based on cost differences. This 
should permit small entities to obtain the same terms and conditions of 
agreements reached by larger carriers that possess greater bargaining 
power without having to incur the costs of negotiation and/or 
arbitration. (Section VII.D.3--Discrimination.)
Summary Analysis of Section VIII--Resale
    944. Summary of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. Pursuant to section 251(b)(1), all LECs, which 
may include small entity competing LECs and small incumbent LECs, may 
not impose unreasonable or discriminatory conditions on, or limit the 
resale of, their telecommunications services. Pursuant to section 
251(c)(4), incumbent LECs are required to offer for resale at wholesale 
rates any telecommunications services that they offer to subscribers 
other than telecommunications carriers. Providing such services for 
resale may require some small entities and small incumbent LECs to use 
additional billing, technical, and operational skills.
    945. Under section 252(a), resellers, which may include small 
entities, are required to prepare and present to incumbent LECs 
requests for services to resell. We do not establish guidelines for the 
content of these requests. Such requests may involve legal, 
engineering, and accounting skills. Resellers may also have to engage 
in arbitration proceedings with incumbent LECs if voluntary 
negotiations resulting from the initial request fail to yield an 
agreement. This may involve legal and general negotiation skills. Where 
a reseller is negotiating or arbitrating with an incumbent LEC, the 
reseller may choose to offer arguments concerning economic and 
accounting data presented by state commissions or incumbent LECs. 
Resellers may also choose to make legal and economic arguments that 
certain resale restrictions are unreasonable. These tasks may require 
legal, economic, and accounting skills.
    946. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. As set 
forth in Section VIII.B, above, our decision to adopt clear national 
rules should reduce regulatory burdens and uncertainty for all parties, 
including small entities and small incumbent LECs. Moreover, our 
decision not to impose eligibility requirements on resellers should 
minimize regulatory burdens for resellers. We reject proposals that the 
Commission not require resale of bundled service offerings, promotions 
and discounts lasting longer than 90 days, residential service, and 
services offered at rates below cost for reasons set forth in Section 
VIII.A.
    947. As discussed in Section VIII.B, we expect that the opportunity 
to resell telecommunications services currently offered exclusively by 
incumbent LECs will lead to increased competition in the provision of 
telecommunications services. We also determine that non-cost-based 
factors shall not be considered when arriving at wholesale discounts, 
and we reject the argument that indirect costs should not be considered 
avoided costs. We also reject proposals that we either require or 
forbid a state to include a measure of profit in its avoided cost 
calculation. As set forth in Section VIII.B, we considered the concerns 
of small incumbent LECs and small entity resellers when adopting the 
default range for wholesale discounts. In addition, we allow a state to 
consider including in wholesale rates the costs that incumbent LECs 
incur in selling services on a wholesale basis, which may minimize the 
economic impact for small incumbent LECs.
    948. As discussed in Section VIII.C, we remove obstacles faced by 
small businesses in reselling telecommunications services by 
establishing a presumption, applicable to incumbent and non-incumbent 
LECs, that most restrictions on resale are unreasonable. This 
presumption should reduce unnecessary burdens on resellers, which may 
include small entities. It may also produce increased opportunities for 
resale competition, which may be expected to be beneficial for some 
small entities and small incumbent LECs. We do not permit state 
commissions to require non-incumbent LECs to offer their services at 
wholesale rates for the reasons set forth in Section VIII.D. For the 
reasons discussed in Section VIII.C, above, we decline to forbear from 
the application of section 251(b)(1) to non-incumbent LECs. We also 
conclude that incumbent LECs are to continue to receive access charge 
revenues when local services are resold under section 251(c)(4) for 
reasons set forth in Section VIII.E, and that such access services are 
not subject to resale at wholesale rates for reasons set forth in 
Section VIII.A.
Summary Analysis of Section IX--Duties Imposed on ``Telecommunications 
Carriers'' by Section 251(a)
    949. Summary of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. Small entities that provide telecommunications 
services are subject to the same obligations imposed on all 
telecommunications carriers under section 251(a)(1) and section 
251(a)(2), and any reporting requirements that attend such obligations. 
Among these duties is the duty to interconnect, directly or indirectly, 
with requesting

[[Page 45614]]

telecommunications carriers. (Section IX--Duties Imposed on 
``Telecommunications Carriers'' By Section 251(a).) This will likely 
require small entities to comply with the technical, economic, and 
legal requirements involved with interconnection, including negotiating 
contracts, utilizing engineering studies, and adding operational 
capacity. (Id.) Small incumbent LECs may incur similar compliance 
requirements to the extent they are required to interconnect with 
entities that qualify as ``telecommunications carriers.''
    950. Small incumbent LECs and small entities providing 
telecommunications services will also be under a duty not to install 
network features, functions, and capabilities that do not comply with 
standards and guidelines under sections 255 and 256. (Section IX--
Duties Imposed on ``Telecommunications Carriers'' By Section 
251(a)(2).) In addition, small entities that provide both information 
services and telecommunications services are classified as 
telecommunications carriers and are subject to certain requirements 
under 251(a). (Section IX--Duties Imposed on ``Telecommunications 
Carriers'' By Section 251(a)(2).)
    951. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. Small 
entities who provide for a fee local, interexchange and international 
services are defined as telecommunications carriers and, thus, also 
receive the benefits of section 251 including interconnection, 
services, and network elements, which may increase their ability to 
compete. (Section IX--Duties Imposed on ``Telecommunications Carriers'' 
By Section 251(a)(2).) We reject the suggestion that CMRS providers, 
some of which likely are small entities, should not be included in the 
definition of a ``telecommunications carrier.'' (Id.) We determine that 
entities operating private, internal or shared communications networks 
do not qualify as telecommunications carriers, however, which excludes 
them from the obligations and benefits under section 251(a). Small 
entities providing information services but not telecommunications 
services are also not classified as telecommunications carriers and, 
thus, will not be bound by the duties of section 251(a). A carrier that 
provides both information and telecommunications services is deemed 
subject to the requirements of section 251(a). We also conclude that 
telecommunications carriers that have interconnected under either 
section 251(a)(1) or 251(c)(2) may offer information services through 
the same arrangement or agreement. This will permit new entrants, many 
of which may be small entities, to offer full ranges of services to end 
users without having to provide some of those services inefficiently 
through distinct facilities or agreements.
    952. We decide that competitive telecommunications carriers that 
have the obligation to interconnect with requesting carriers may 
choose, based upon their own characteristics, whether to allow direct 
or indirect interconnection. (Section IX--Duties Imposed on 
``Telecommunications Carriers'' By Section 251(a).) This should allow 
significant flexibility for small entities to choose the most efficient 
and economical arrangement for their particular strategy. As set forth 
in Section IX, we reject an argument to forbear, under section 10 of 
the Communications Act, from imposing any interconnection requirements 
on non-dominant carriers.
Summary Analysis of Section X--Commercial Mobile Radio Services
    953. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. We are applying sections 251 and 252 to LEC-
CMRS interconnection at this time. (Section X.D--Jurisdictional 
Authority for Regulation of LEC-CMRS Interconnection Rates.) We may 
revisit our determination not to invoke jurisdiction under section 332 
to regulate LEC-CMRS interconnection rates if we determine that the 
regulatory scheme established by sections 251 and 252 does not 
sufficiently address the problems encountered by CMRS providers, many 
of which may be small entities, in obtaining interconnection on terms 
and conditions that are just, reasonable, and nondiscriminatory.
    954. Pursuant to our findings in Section X.D, a small CMRS entity 
seeking to enter into a reciprocal compensation agreement with an 
incumbent LEC, which may be a small incumbent LEC, will have to comply 
with sections 251 and 252, and state law. The reporting, recordkeeping, 
and other compliance requirements associated with reciprocal 
compensation are summarized in the following section concerning 
obligations under section 251(b).
    955. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. The 
Commission's actions may minimize the economic impact on CMRS 
providers, many of which are small entities, by declaring that CMRS 
providers are not required to comply with the obligations of LECs under 
section 251(b)(5). We decline to adopt the alternative of finding that 
a CMRS provider is a LEC for the reasons set forth in Section X.A. We 
also determine that CMRS providers are entitled to request reciprocal 
compensation under section 251(b)(5), and that certain CMRS providers 
are also entitled to request interconnection under section 251(c)(2). 
As discussed in the following section concerning obligations under 
section 251(b), these decisions may permit small entity CMRS providers 
the opportunity to considerably expand their businesses.
Summary Analysis of Section XI--Obligations Imposed on LECS by 251(b)
A. Reciprocal Compensation for Transport and Termination of 
Telecommunications
    956. Summary of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. All local exchange carriers, including small 
incumbent LECs and perhaps some small entities offering competing local 
exchange services, have a duty to establish reciprocal compensation for 
the transport and termination of local telecommunications traffic, as 
defined by state commissions. As such, small incumbent LECs and small 
entities offering competitive local exchange services may be required 
to measure the exchange of traffic, and to bill and collect payment 
from other carriers. (Section XI.A--Reciprocal Compensation for 
Transport and Termination of Telecommunications.) Reciprocal 
compensation for the transport and termination of traffic may be based 
on the incumbent LEC's cost studies, which may require small incumbent 
LECs to use economic skills to perform cost studies. To the extent that 
a competing provider of local exchange services, which may include a 
small entity, believes its costs for the transportation and termination 
of traffic differ from those of the incumbent LEC, it would also be 
required to provide a forward-looking, economic cost study. (Id.)
    957. If a CMRS provider entered into an agreement with an incumbent 
LEC prior to August 8, 1996 that does not provide for mutual 
compensation, the CMRS provider may demand to renegotiate the 
agreement. This may impose the burden of re-negotiation on small 
incumbent LECs, which may require legal, accounting, and economic 
skills. In addition, pending the successful completion of negotiation 
or arbitration, symmetrical reciprocal

[[Page 45615]]

compensation shall apply, which may have the effect of raising the 
amount small incumbent LECs currently pay CMRS providers to terminate 
LEC-originated traffic. This may have the effect of increasing small 
incumbent LECs' costs. Finally, a state commission may impose bill-and-
keep arrangements between carriers if the state commission determines 
that the amount of local telecommunications traffic from one network to 
the other is approximately equal to the amount of local 
telecommunications traffic flowing in the opposite directions, and is 
expected to remain thus. This could have the effect of reducing small 
incumbent LECs' revenues and decreasing the expenses of small entities. 
It also might place a burden on small entities and small incumbent LECs 
of establishing that traffic volumes are imbalanced, which might 
require accounting, economic, and legal skills.
    958. We require paging companies seeking to recover fees for 
terminating local calls to demonstrate to the state the costs of 
terminating such calls. (Section XI.A.--Reciprocal Compensation for 
Transport and Termination of Traffic.) Consequently, small entity 
paging companies and possibly small incumbent LECs may be required to 
use legal, economic, and possibly accounting skills.
    959. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. Our 
adoption of national default price ceilings and ranges for 
transportation and termination of local traffic being arbitrated by the 
states should provide all parties, including small incumbent LECs and 
many new entrant small entities, with a clear understanding of the 
terms and conditions that will govern should they fail to reach an 
agreement. This should minimize regulatory burdens and economic impacts 
for those companies, in part by reducing the transaction costs of 
arbitration. (Section XI.A.3.c.(4)--Default Proxies.) Permitting CMRS 
providers with non-reciprocal agreements to renegotiate their 
agreements, and imposing symmetrical reciprocal compensation pending 
completion of negotiation or arbitration, will provide all parties with 
certainty as to applicable rates as of the date of this order, and 
minimize litigation and regulatory costs. We believe this decision is 
consistent with the pro-competitive goals of the 1996 Act.
    960. We define transport and termination as separate functions--
each with its own cost calculation for the purposes of sections 251 and 
252. This definition may permit interconnecting carriers, including 
small entities, to obtain transport and termination services at lower 
rates and avoid paying above-cost rates or rates for unneeded services. 
(Section XI.A.2--Definition of Transport and Termination of 
Telecommunications.) We also conclude that a LEC may not charge a CMRS 
provider or other carrier, which may be a small entity, for receiving 
and terminating LEC-originated traffic. (Section XI.A.4--Symmetry.) We 
do not permit interexchange carriers to use transport and termination 
services to avoid the obligation to pay access charges for terminating 
interexchange traffic with incumbent LECs. (Section XI.A.2--Definition 
of Transport and Termination of Telecommunications.)
    961. Our decision to permit new entrants to base reciprocal 
compensation arrangements on incumbent LECs' cost studies may reduce 
barriers to entry by permitting competing LECs to avoid performing 
their own forward-looking, economic cost studies, which may be expected 
to reduce the overall burdens and minimize the economic impact of 
regulation on these small entities. (Section XI.A.4--Symmetry.) The 
ability of state commissions to impose bill and keep arrangements where 
the costs of terminating traffic are nearly symmetrical, traffic volume 
is roughly balanced, and both are expected to remain so, may allow 
small entities and small incumbent LECs to avoid the cost of measuring 
traffic exchange. (Section XI.A.5--Bill and Keep.) For the reasons set 
forth in Section XI.A.5 above, we reject the proposed alternative of 
permitting states to adopt bill-and-keep arrangements for the transport 
and termination of traffic where the cost of terminating traffic is not 
nearly symmetrical.
    962. By requiring that rates for transport and termination be cost 
based, we believe that all parties in telecommunications markets, 
including small incumbent LECs and small entities, may benefit from 
increased opportunities to compete effectively in local exchange 
markets. (Section XI.A.3--Pricing Methodology.) In addition, we 
conclude that termination rates for LECs, including small incumbent 
LECs, should include an allocation of forward-looking common costs, but 
not an element for the recovery of lost contributions. These decisions 
may be expected to minimize the economic impact of our decisions on 
small incumbent LECs and small entities.
    963. This Order eliminates certain charges paging companies may now 
be assessed by LECs and enables paging companies to claim new revenues 
from LECs for terminating paging calls. (Section XI.A--Reciprocal 
Compensation for Transport and Termination of Telecommunications.) 
Paging companies, including small entities, may thereby incur lower 
costs. Such entities also may increase their revenues, depending on the 
outcome of any proceedings concerning their termination costs. For the 
reasons set forth in Section XI.A.3 above, we cannot conclude, at this 
time, that a LEC's forward looking costs may be used as a reasonable 
proxy for the costs of call termination by paging providers. We further 
conclude that the default price for termination of traffic from the end 
office that we adopt in this proceeding in Section XI.A.3 above does 
not apply to termination of traffic by paging providers. This default 
price is based on estimates in the record of the costs to LECs of 
termination from the end office or end-office switching.
B. Access to Rights-of-Way
    964. Summary of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. Small incumbent LECs that meet the definition 
of a utility (The Act defines ``utility'' as ``any person who is a 
local exchange carrier or an electric, gas, water, steam, or other 
public utility, and who owns or controls poles, ducts, conduits, or 
rights-of-way used, in whole or in part, for any wire communication.'') 
and own poles, ducts, conduits and rights-of-way where access was not 
previously mandated are now required to provide access to requesting 
telecommunications carriers (other than incumbent LECs and cable 
television systems) which may require the use of legal, engineering, 
and accounting resources for evaluation and processing of attachment 
requests. (Section XI.B.2--Section 224(f): Non-discriminatory Access.) 
This may also require small incumbent LECs and small entities to employ 
technical personnel to modify pole attachment arrangements.
    965. A complaint of unjustified denial of access must be supported 
by a written request for access, the utility's response, and 
information supporting the complainant's position. This will likely 
impose some recordkeeping requirements on small incumbent LECs and 
small entities seeking access to rights-of-way. Our requirements may 
also impose administrative requirements, including legal and 
engineering expertise, on small governmental jurisdictions (Under the 
Regulatory Flexibility Act, a ``small governmental jurisdiction'' is 
one type

[[Page 45616]]

of ``small entity,'' and is defined as the ``governments of cities, 
counties, towns, townships, villages, school districts, or special 
districts with a population of less than fifty thousand * * * .'' 5 
U.S.C. 601(5).) that resolve disputes arising under section 224 of the 
Communications Act. (Section XI.B.5.c.2--Dispute Resolution.) In 
addition, small governmental jurisdictions that have established rules 
and regulations for access to poles, ducts and conduits specifically, 
and interconnection generally, are also likely to have some level of 
reporting and recordkeeping requirements for competing 
telecommunications carriers that use the poles, some of which may be 
small entities. (Section XI.B.6--Reverse Preemption.)
    966. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. In 
placing the burden of proof on the denying utility with respect to the 
propriety of a denial of access, we recognize that new entrants, which 
may be small entities, are not likely to have access to such 
information without cooperation from the utilities. Complaints should 
not be dismissed where the petitioner was unable to obtain a written 
response from the denying utility, or where the utility also denied the 
petitioner any relevant information needed to establish a prima facie 
case. These provisions should allow an entrant to pursue a claim 
without the need for expensive discovery, and should not preclude or 
discourage entities with limited resources from seeking redress where 
access is denied. (Section XI.B.5--Dispute Resolution.) For the reasons 
set forth in Section XI.B.5, we reject the recommendation that an 
applicant be allowed to seek injunctive relief in federal court and 
select federal jurisdiction for enforcement or appeal of any matter 
regarding pole attachments. Our conclusion that state and local pole 
attachment requirements are presumed reasonable may minimize burdens on 
small governmental jurisdictions by preserving existing rules and 
procedures, and the local government's expertise with its own rules. 
(Section XI.B.2--Specific Rules.) In reaching this result, we reject 
the alternative of invalidating such state regulations in favor of 
federal rules for the reasons stated in Section XI.B.2. Our 
determination not to prescribe numerous specific rules in this area 
recognizes the varying technologies and facilities deployed by 
incumbent LECs, including small incumbent LECs. For example, we 
recognize that utilities, including small incumbent LECs, normally have 
their own operating standards that dictate conditions of access. Thus, 
we leave in place such conditions of access. For the reasons set forth 
in Section XI.B, we reject the alternative of prescribing a 
comprehensive set of substantive engineering standards governing access 
to rights-of-way.
    967. When an attaching entity modifies poles for its use, it will 
be entitled to recover a share of its expenses from any later-attaching 
entities. (Section XI.B.4--Modifications.) This should permit attaching 
entities that modify poles, some of which may be small entities, to 
bear only their proportionate costs and prevent them from effectively 
subsidizing their later-entering competitors. The requirement that 
utilities provide attaching entities with 60 days' notice prior to 
commencing modifications to any pole, duct or conduit should provide 
attaching entities, some of which may be small entities, with 
sufficient time to evaluate the impact of the proposed modification on 
their interests and to plan and coordinate any modifications to their 
own attachments. (Id.)
C. Imposing Additional Obligations on LECs
    968. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. Our decisions in this section of the Order do 
not subject any small entities to reporting, recordkeeping or other 
compliance requirements.
    969. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. The 
determination that the 1996 Act does not permit the particular 
obligations for incumbent LECs set forth in section 251(c) to be 
imposed on non-incumbent carriers, absent a finding by the Commission 
under section 251(h)(2), should limit potential burdens on new 
entrants, including small entities. (Section XI.C--Imposing Obligations 
on LECs.)
Summary Analysis of Section XII--Exemptions, Suspensions and 
Modifications of Section 251 Requirements
    970. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. Section 251(f)(1) grants rural telephone 
companies, which may be small incumbent LECs, an exemption from the 
requirements of section 251(c) (which only apply to incumbent LECs) 
until the rural telephone company has received a bona fide request for 
interconnection, services, or network elements, and the state 
determines that the exemption should be terminated. Section 251(f)(2) 
provides that LECs with fewer than two percent of the nation's 
subscriber lines may petition a state commission for a suspension or 
modification of any requirements of sections 251(b) and 251(c). The 
latter provision, section 251(f)(2), is available to all LECs including 
competitive LECs, which may be small entities.
    971. After a carrier has made a bona fide request under Section 
251, a rural telephone company, which may be a small incumbent LEC, 
seeking to retain its exemption under section 251(f)(1) must prove to 
the state commission that it should retain its exemption. To remove the 
exemption, a state commission must find that the bona fide 
interconnection request is not unduly economically burdensome, is 
technically feasible, and is consistent with section 254. The parties 
involved in such a proceeding may need to use legal, accounting, 
economic and/or engineering services. A small incumbent LEC or a 
competitive LEC, which may be a small entity, seeking under 251(f)(2) 
to modify or suspend the national interconnection requirements imposed 
by section 251(b) or 251(c) bears the burden of proving that 
interconnection would: (1) create a significant adverse economic impact 
on telecommunications users; (2) be unduly economically burdensome; or 
(3) be technically infeasible.
    972. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. As set 
forth in Section XII above, the determination whether a section 251(f) 
exemption, suspension, or modification should be continued or granted 
lies primarily with the relevant state commission. By largely leaving 
this determination to the states, our decisions permit this fact-
specific inquiry to be administered in a manner that minimizes 
regulatory burdens and the economic impact on small entities and small 
incumbent LECs. However, to further minimize regulatory burdens and 
minimize the economic impact of our decision, we adopt several rules as 
set forth in Section XII above, which may facilitate the efficient 
resolution of such inquiries, provide guidance, and minimize 
uncertainty. As set forth in Section XII above, we find that the rural 
LEC or smaller LEC must prove to the state commission that the 
financial harm shown to justify an exemption, suspension, or 
modification would be greater than the harm that might

[[Page 45617]]

typically be expected as a result of competition. Finally, we conclude 
that section 251(f) adequately provides for varying treatment for 
smaller or rural LECs where such variances are justified. As a result, 
we expect that section 251(f) will significantly minimize regulatory 
burdens and economic impacts from the rules adopted in this Order.
Summary Analysis of Section XIII--Advanced Telecommunications 
Capabilities
    973. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. Our decision to defer consideration of rules 
in this section of the Order does not subject any small entities or 
small incumbent LECs to reporting, recordkeeping or other compliance 
requirements.
    974. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. We do 
not anticipate that our decision to defer consideration of rules in 
this section of the Order will have any economic impact on small 
entities or small incumbent LECs.
Summary Analysis of Section XIV--Provisions of Section 252
A. Section 252(e)(5)
    975. Summary of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. Pursuant to section 252(b)(1), a party to 
negotiation may petition a state commission to arbitrate any open 
issues. Small entities and small incumbent LECs negotiating 
interconnection agreements may, therefore, participate in state 
arbitration in order to obtain an interconnection agreement, which may 
impose significant legal costs. (Section XIV.A--Section 252(e)(5).) 
Section 252(e)(5) requires the Commission to assume the state's 
responsibility under section 252 if the state ``fails to act to carry 
out its responsibility'' under the section. We require an aggrieved 
party, which may be a small entity or a small incumbent LEC, to notify 
the FCC that a state commission has failed to act under section 252 by 
filing a detailed written petition, backed by affidavit. As set forth 
above in Section XIV.A, if the Commission, following a notice and 
comment period, determines that the state has failed to act, the 
Commission will assume authority under section 252(e)(5) and mediate or 
arbitrate the dispute. This process may also entail significant legal 
expertise.
    976. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. In this 
Order, the Commission adopts a minimum set of rules that will provide 
notice of the standards and procedures that the Commission will use if 
it has to assume the responsibility of a state commission under section 
252(e)(5). These rules should benefit small entities and small 
incumbent LECs by limiting uncertainty and minimizing transaction costs 
associated with the arbitration process. (Section XIV.A--Section 
252(e)(5).)
    977. The Commission concludes that, if it arbitrates agreements, it 
will use a ``final offer'' arbitration method, whereby each party to 
the arbitration proposes its best and final offer, and the arbitrator 
chooses between the proposals. The arbitrator may choose either 
proposal in its entirety, or could choose different parties' proposals 
on an issue-by-issue basis. This method of arbitration should minimize 
the economic impact on small entities and small incumbent LECs by 
reducing the transaction costs associated with arbitration. Our rules 
should also encourage parties, to negotiate after offers are submitted 
which should provide additional flexibility for parties including small 
entities and small incumbent LECs, to agree to a resolution tailored to 
their interests. (Section XIV.A--Section 252(e)(5).)
    978. For the reasons set forth above in Section XIV.A, we reject 
the alternative of adopting national rules governing state arbitration 
procedures. We believe the states are in a better position to develop 
mediation and arbitration rules that support the objectives of the 1996 
Act. States may develop specific measures that best address the 
concerns of small entities and small incumbent LECs participating in 
mediation or arbitration.
    979. As set forth above in Section XIV.A, we reject the suggestion 
that the Commission return jurisdiction over an arbitration to the 
state commission. We further reject the argument that, once the 
Commission has mediated or arbitrated an agreement, the agreement must 
be submitted to the state commission for approval under state law. We 
decline to adopt the alternative suggested by some parties that, if the 
Commission steps into the state commission role, it is bound by state 
laws and standards that would have applied to the state commission. 
(Section XIV.A--Section 252(e)(5).).
    980. As explained above in Section XIV.A, we also reject the 
alternative that an arbitrated agreement not be binding on the parties. 
Finally, we reject the alternative of opening the arbitration process 
to all third parties, which should minimize the costs involved in such 
proceedings.
B. Requirements of Section 252(i)
    981. Summary of Projected Reporting, Recordkeeping and Other 
Compliance Requirements. Our decisions in this section of the Order do 
not subject any small entities to reporting, recordkeeping or other 
compliance requirements. Incumbent LECs, including small incumbent 
LECs, are required to file with state commissions all interconnection 
agreements entered into with other carriers, including adjacent 
incumbent LECs. Incumbent LECs must also permit third parties to obtain 
any individual interconnection, service or network element arrangement 
on the same terms and conditions as those contained in any agreement 
approved under section 252. Moreover, incumbent LECs must prove with 
specificity that terms and conditions contained in filed agreements are 
legitimately related to the purchase of the individual element or 
service being sought. Incumbent LECs must provide ``most favored 
nation'' status with regard to subsequent carriers regardless of 
whether they include ``most favored nation'' clauses in their 
agreements. Complying with these requirements may require small 
incumbent LECs and requesting small entities to use legal and 
negotiation skills.
    982. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Small Incumbent LECs, and Alternatives Considered. Our 
decision to adopt national standards to implement section 252(i) should 
minimize the economic impact of our decision on both small entities and 
small incumbent LECs by expediting the resolution of disputes, thereby 
reducing transaction costs associated with interconnection. Our 
decision that section 252(i) permits requesting carriers to choose 
among individual provisions contained in publicly-filed interconnection 
agreements should minimize the economic impact for small new entrants 
by permitting them to obtain the provisions they desire without having 
to adopt entire agreements that would not reflect their costs or the 
specific technical characteristics of their networks. (Section XIV.B--
Section 252(i).) Moreover, small entities may be able to obtain the 
same terms and conditions of agreements reached by larger carriers that 
possess greater bargaining power without having to incur the costs of 
negotiation and/or arbitration.
    983. We also determine that publicly-filed agreements need only be 
made available to carriers who cause

[[Page 45618]]

incumbent LECs to incur no greater costs than did the original carrier, 
which should minimize the economic impact on small incumbent LECs. We 
also minimize the regulatory burden for small entities and small 
incumbent LECs by finding that a new entrant seeking interconnection, 
network elements, or services pursuant to section 252(i) need not make 
such requests pursuant to the procedures for initial section 251 
requests, but shall be permitted to obtain access to agreements on an 
expedited basis.
    984. As set forth above, we conclude that section 252(i) permits 
differential treatment of carriers based on differences in the costs of 
serving those carriers, but does not permit incumbent LECs to limit the 
availability of interconnection, services, or network elements only to 
those requesting carriers serving a comparable class of subscribers or 
providing the same service as the original party to the agreement. 
(Section XIV--Section 252(i).) These decisions should minimize the 
impact on small entities by preventing discrimination and enabling them 
to obtain the same terms and conditions as larger carriers that possess 
greater bargaining power. For the reasons set forth in Section XIV, we 
reject the interpretation favored by commenters arguing that new 
entrants should not be able to choose among provisions of 
interconnection agreements filed with state commissions.

E. Report to Congress

    985. The Commission shall send a copy of this FRFA, along with this 
Order, in a report to Congress pursuant to the Small Business 
Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 
Sec. 801(a)(1)(A). A copy of this FRFA will also be published in the 
Federal Register.

XVI. Ordering Clauses

    986. Accordingly, it is ordered that, pursuant to Sections 1-4, 
201-209, 214, 218, 224, 251, 252, and 303(r) of the Communications Act 
of 1934, as amended, and Section 601 of the Telecommunications Act of 
1996, 47 U.S.C. 151-154, 201-209, 214, 218, 224, 251, 252, 303(r), the 
Report and order is adopted, effective September 30, 1996. The 
collections of information contained within are contingent upon 
approval by the Office of Management and Budget.
    987. It is further ordered that Part 51 of the Commission's rules, 
47 CFR Sec. 51 is Added as set forth below.
    988. It is further ordered that, to the extent issues from CC 
Docket No. 95-185, In the Matter of Interconnection Between Local 
Exchange Carriers and Commercial Mobile Service Providers, are resolved 
here, we incorporate the relevant portions of the record in that 
docket.
    989. It is further ordered that, to the extent issues from CC 
Docket No. 91-346, In the Matter of Intelligent Networks, are resolved 
here, we incorporate the relevant portions of the record in that 
docket.
    990. It is further ordered, light of the United States Court of 
Appeals for the District of Columbia Circuit in Pacific Bell v. FCC, 81 
F.3d 1147 (D.C. Cir. 1996) (table) and the Telecommunications Act of 
1996, that the rules and policies adopted in Expanded Interconnection 
with Local Telephone Company Facilities, CC Docket No. 91-141, 9 FCC 
Rcd 5154 (1994), shall remain in effect.

List of Subjects

47 CFR Part 1

    Access to rights of way, Telecommunications.

47 CFR Part 20

    Communications common carriers, Interconnection.

47 CFR Part 51

    Collocation, Communications common carriers, Interconnection, 
Network elements, Pricing standard, Proxies, Reciprocal compensation, 
Resale, Transport and termination.

47 CFR Part 90

    Common carriers.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

Rule Changes

    Parts 1, 20, 51 and 90 of Title 47 of the Code of Federal 
Regulations are amended as follows:

PART 1--PRACTICE AND PROCEDURE

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 47 U.S.C. 151, 154, 251, 252, 303, and 309(j) unless 
otherwise noted.

    2. Section 1.1401 is revised to read as follows:


Sec. 1.1401  Purpose.

    The rules and regulations contained in subpart J of this part 
provide complaint and enforcement procedures to ensure that 
telecommunications carriers and cable system operators have 
nondiscriminatory access to utility poles, ducts, conduits, and rights-
of-way on rates, terms, and conditions that are just and reasonable.
    3. Section 1.1402 is amended by revising paragraph (d) to read as 
follows:


Sec. 1.1402  Definitions.

* * * * *
    (d) The term complaint means a filing by a cable television system 
operator, a cable television system association, a utility, an 
association of utilities, a telecommunications carrier, or an 
association of telecommunications carriers alleging that it has been 
denied access to a utility pole, duct, conduit, or right-of-way in 
violation of this subpart and/or that a rate, term, or condition for a 
pole attachment is not just and reasonable.
* * * * *
    4. Section 1.1403 is revised to read as follows:


Sec. 1.1403  Duty to provide access; modifications; notice of removal, 
increase or modification; petition for temporary stay.

    (a) A utility shall provide a cable television system or any 
telecommunications carrier with nondiscriminatory access to any pole, 
duct, conduit, or right-of-way owned or controlled by it. 
Notwithstanding this obligation, a utility may deny a cable television 
system or any telecommunications carrier access to its poles, ducts, 
conduits, or rights-of-way, on a non-discriminatory basis where there 
is insufficient capacity or for reasons of safety, reliability and 
generally applicable engineering purposes.
    (b) Requests for access to a utility's poles, ducts, conduits or 
rights-of-way by a telecommunications carrier or cable operator must be 
in writing. If access is not granted within 45 days of the request for 
access, the utility must confirm the denial in writing by the 45th day. 
The utility's denial of access shall be specific, shall include all 
relevant evidence and information supporting its denial, and shall 
explain how such evidence and information relate to a denial of access 
for reasons of lack of capacity, safety, reliability or engineering 
standards.
    (c) A utility shall provide a cable television system operator or 
telecommunications carrier no less than 60 days written notice prior 
to:
    (1) Removal of facilities or termination of any service to those 
facilities, such removal or termination arising out of a rate, term or 
condition of the cable television system operator's of 
telecommunications carrier's pole attachment agreement;

[[Page 45619]]

    (2) Any increase in pole attachment rates; or
    (3) Any modification of facilities other than routine maintenance 
or modification in response to emergencies.
    (d) A cable television system operator or telecommunications 
carrier may file a ``Petition for Temporary Stay'' of the action 
contained in a notice received pursuant to paragraph (c) of this 
section within 15 days of receipt of such notice. Such submission shall 
not be considered unless it includes, in concise terms, the relief 
sought, the reasons for such relief, including a showing of irreparable 
harm and likely cessation of cable television service or 
telecommunication service, a copy of the notice, and certification of 
service as required by Sec. 1.1404(b). The named respondent may file an 
answer within 7 days of the date the Petition for Temporary Stay was 
filed. No further filings under this section will be considered unless 
requested or authorized by the Commission and no extensions of time 
will be granted unless justified pursuant to Sec. 1.46.5. Section 
1.1404 is amended by revising paragraphs (b) and (c) and by adding new 
paragraph (k) to read as follows:


Sec. 1.1404  Complaint.

* * * * *
    (b) The complaint shall be accompanied by a certification of 
service on the named respondent, and each of the Federal, State, and 
local governmental agencies that regulate any aspect of the services 
provided by the complainant or respondent.
    (c) In a case where it is claimed that a rate, term, or condition 
is unjust or unreasonable, the complaint shall contain a statement that 
the State has not certified to the Commission that it regulates the 
rates, terms and conditions for pole attachments. The complaint shall 
include a statement that the utility is not owned by any railroad, any 
person who is cooperatively organized or any person owned by the 
Federal Government or any State.
* * * * *
    (k) In a case where a cable television system operator or 
telecommunications carrier claims that it has been denied access to a 
pole, duct, conduit or right-of-way despite a request made pursuant to 
section 47 U.S.C. Sec. 224(f), the complaint shall be filed within 30 
days of such denial. In addition to meeting the other requirements of 
this section, the complaint shall include the data and information 
necessary to support the claim, including:
    (1) The reasons given for the denial of access to the utility's 
poles, ducts, conduits and rights-of-way;
    (2) The basis for the complainant's claim that the denial of access 
is improper;
    (3) The remedy sought by the complainant;
    (4) A copy of the written request to the utility for access to its 
poles, ducts, conduits or rights-of-way; and
    (5) A copy of the utility's response to the written request 
including all information given by the utility to support its denial of 
access. A complaint alleging improper denial of access will not be 
dismissed if the complainant is unable to obtain a utility's written 
response, or if the utility denies the complainant any other 
information needed to establish a prima facie case.
    6. Section 1.1409 is amended by revising paragraphs (b) and (d) to 
read as follows:


Sec. 1.1409  Commission consideration of the complaint.

* * * * *
    (b) The complainant shall have the burden of establishing a prima 
facie case that the rate, term, or condition is not just and reasonable 
or that the denial of access violates 47 U.S.C. Sec. 224(f). If, 
however, a utility argues that the proposed rate is lower than its 
incremental costs, the utility has the burden of establishing that such 
rate is below the statutory minimum just and reasonable rate. In a case 
involving a denial of access, the utility shall have the burden of 
proving that the denial was lawful, once a prima facie case is 
established by the complainant.
* * * * *
    (d) The Commission shall deny the complaint if it determines that 
the complainant has not established a prima facie case, or that the 
rate, term or condition is just and reasonable, or that the denial of 
access was lawful.
* * * * *
    7. Section 1.1416 is amended by revising the section-heading and 
paragraph (b) to read as follows:


Sec. 1.1416  Imputation of rates; modification costs.

* * * * *
    (b) The costs of modifying a facility shall be borne by all parties 
that obtain access to the facility as a result of the modification and 
by all parties that directly benefit from the modification. Each party 
described in the preceding sentence shall share proportionately in the 
cost of the modification. A party with a preexisting attachment to the 
modified facility shall be deemed to directly benefit from a 
modification if, after receiving notification of such modification as 
provided in subpart J of this part, it adds to or modifies its 
attachment. Notwithstanding the foregoing, a party with a preexisting 
attachment to a pole, conduit, duct or right-of-way shall not be 
required to bear any of the costs of rearranging or replacing its 
attachment if such rearrangement or replacement is necessitated solely 
as a result of an additional attachment or the modification of an 
existing attachment sought by another party. If a party makes an 
attachment to the facility after the completion of the modification, 
such party shall share proportionately in the cost of the modification 
if such modification rendered possible the added attachment.

PART 20--COMMERCIAL MOBILE RADIO SERVICES

    8. The authority citation for part 20 is revised to read as 
follows:

    Authority: Secs. 4, 251-2, 303, and 332, 48 Stat. 1066, 1062, as 
amended; 47 U.S.C. 154, 251-4, 303, and 332 unless otherwise noted.

    9. Section 20.11 is amended by adding paragraph (c) to read as 
follows:


Sec. 20.11  Interconnection to facilities of local exchange carriers.

* * * * *
    (c) Local exchange carriers and commercial mobile radio service 
providers shall also comply with applicable provisions of part 51 of 
this chapter.
* * * * *
    10. A new part 51 is added to read as follows:

PART 51--INTERCONNECTION

Subpart A--General Information

Sec.
51.1  Basis and purpose.
51.3  Applicability to negotiated agreements.
51.5  Terms and definitions.

Subpart B--Telecommunications Carriers

51.100  General duty.

Subpart C--Obligations of All Local Exchange Carriers

51.201  Resale.
51.203  Number portability.
51.219  Access to rights of way.
51.221  Reciprocal compensation.
51.223  Application of additional requirements.

Subpart D--Additional Obligations of Incumbent Local Exchange Carriers

51.301  Duty to negotiate.
51.303  Preexisting agreements.
51.305  Interconnection.
51.307  Duty to provide access on an unbundled basis to network 
elements.

[[Page 45620]]

51.309  Use of unbundled network elements.
51.311  Nondiscriminatory access to unbundled network elements.
51.313  Just, reasonable and nondiscriminatory terms and conditions 
for the provision of unbundled network elements.
51.315  Combination of unbundled network elements.
51.317  Standards for identifying network elements to be made 
available.
51.319  Specific unbundling requirements.
51.321  Methods of obtaining interconnection and access to unbundled 
elements under section 251 of the Act.
51.323  Standards for physical collocation and virtual collocation.
Subpart E--Exemptions, Suspensions, and Modifications of Requirements 
of Section 251 of the Act
51.401  State authority.
51.403  Carriers eligible for suspension or modification under 
section 251(f)(2) of the Act.
51.405  Burden of proof.

Subpart F--Pricing of Elements

51.501  Scope.
51.503  General pricing standard.
51.505  Forward-looking economic cost.
51.507  General rate structure standard.
51.509  Rate structure standards for specific elements.
51.511  Forward-looking economic cost per unit.
51.513  Proxies for forward-looking economic cost.
51.515  Application of access charges.

Subpart G--Resale

51.601  Scope of resale rules.
51.603  Resale obligation of all local exchange carriers.
51.605  Additional obligations of incumbent local exchange carriers.
51.607  Wholesale pricing standard.
51.609  Determination of avoided retail costs.
51.611  Interim wholesale rates.
51.613  Restrictions on resale.
51.615  Withdrawal of services.
51.617  Assessment of end user common line charge on resellers.
Subpart H--Reciprocal Compensation for Transport and Termination of 
Local Telecommunications Traffic
51.701  Scope of transport and termination pricing rules.
51.703  Reciprocal compensation obligation of LECs.
51.705  Incumbent LECs' rates for transport and termination.
51.707  Default proxies for incumbent LECs' transport and 
termination rates.
51.709  Rate structure for transport and termination.
51.711  Symmetrical reciprocal compensation.
51.713  Bill-and-keep arrangements for reciprocal compensation.
51.715  Interim transport and termination pricing.
51.717  Renegotiation of existing non-reciprocal arrangements.

Subpart I--Procedures for Implementation of Section 252 of the Act

51.801  Commission action upon a state commission's failure to act 
to carry out its responsibility under section 252 of the Act.
51.803  Procedures for Commission notification of a state 
commission's failure to act.
51.805  The Commission's authority over proceedings and matters.
51.807  Arbitration and mediation of agreements by the Commission 
pursuant to section 252(e)(5) of the Act.
51.809  Availability of provisions of agreements to other 
telecommunications carriers under section 252(i) of the Act.

    Authority: Sections 1-5, 7, 201-05, 218, 225-27, 251-54, 271, 48 
Stat. 1070, as amended, 1077; 47 U.S.C. 151-55, 157, 201-05, 218, 
225-27, 251-54, 271, unless otherwise noted.

Subpart A--General Information


Sec. 51.1  Basis and purpose.

    (a) Basis. These rules are issued pursuant to the Communications 
Act of 1934, as amended.
    (b) Purpose. The purpose of these rules is to implement sections 
251 and 252 of the Communications Act of 1934, as amended, 47 U.S.C. 
251 and 252.


Sec. 51.3  Applicability to negotiated agreements.

    To the extent provided in section 252(e)(2)(A) of the Act, a state 
commission shall have authority to approve an interconnection agreement 
adopted by negotiation even if the terms of the agreement do not comply 
with the requirements of this part.


Sec. 51.5  Terms and definitions.

    Terms used in this part have the following meanings:
    Act. The Communications Act of 1934, as amended.
    Advanced intelligent network. ``Advanced Intelligent Network'' is a 
telecommunications network architecture in which call processing, call 
routing, and network management are provided by means of centralized 
databases located at points in an incumbent local exchange carrier's 
network.
    Arbitration, final offer. ``Final offer arbitration'' is a 
procedure under which each party submits a final offer concerning the 
issues subject to arbitration, and the arbitrator selects, without 
modification, one of the final offers by the parties to the arbitration 
or portions of both such offers. ``Entire package final offer 
arbitration,'' is a procedure under which the arbitrator must select, 
without modification, the entire proposal submitted by one of the 
parties to the arbitration. ``Issue-by-issue final offer arbitration,'' 
is a procedure under which the arbitrator must select, without 
modification, on an issue-by-issue basis, one of the proposals 
submitted by the parties to the arbitration.
    Billing. ``Billing'' involves the provision of appropriate usage 
data by one telecommunications carrier to another to facilitate 
customer billing with attendant acknowledgements and status reports. It 
also involves the exchange of information between telecommunications 
carriers to process claims and adjustments.
    Commercial Mobile Radio Service (CMRS). ``CMRS'' has the same 
meaning as that term is defined in Sec. 20.3 of this chapter.
    Commission. ``Commission'' refers to the Federal Communications 
Commission.
    Directory assistance service. ``Directory assistance service'' 
includes, but is not limited to, making available to customers, upon 
request, information contained in directory listings.
    Directory listings. ``Directory listings'' are any information:
    (1) Identifying the listed names of subscribers of a 
telecommunications carrier and such subscriber's telephone numbers, 
addresses, or primary advertising classifications (as such 
classifications are assigned at the time of the establishment of such 
service), or any combination of such listed names, numbers, addresses 
or classifications; and
    (2) That the telecommunications carrier or an affiliate has 
published, caused to be published, or accepted for publication in any 
directory format.
    Downstream database. A ``downstream database'' is a database owned 
and operated by an individual carrier for the purpose of providing 
number portability in conjunction with other functions and services.
    Equipment necessary for interconnection or access to unbundled 
network elements. For purposes of section 251(c)(2) of the Act, the 
equipment used to interconnect with an incumbent local exchange 
carrier's network for the transmission and routing of telephone 
exchange service, exchange access service, or both. For the purposes of 
section 251(c)(3) of the Act, the equipment used to gain access to an 
incumbent local exchange carrier's unbundled network elements for the 
provision of a telecommunications service.
    Incumbent Local Exchange Carrier (Incumbent LEC). With respect to 
an area, the local exchange carrier that:

[[Page 45621]]

    (1) On February 8, 1996, provided telephone exchange service in 
such area; and
    (2)(i) On February 8, 1996, was deemed to be a member of the 
exchange carrier association pursuant to Sec. 69.601(b) of this 
chapter; or
    (ii) Is a person or entity that, on or after February 8, 1996, 
became a successor or assign of a member described in paragraph (2)(i) 
of this section.
    Interconnection. ``Interconnection'' is the linking of two networks 
for the mutual exchange of traffic. This term does not include the 
transport and termination of traffic.
    Local Exchange Carrier (LEC). A ``LEC'' is any person that is 
engaged in the provision of telephone exchange service or exchange 
access. Such term does not include a person insofar as such person is 
engaged in the provision of a commercial mobile service under section 
332(c) of the Act, except to the extent that the Commission finds that 
such service should be included in the definition of the such term.
    Maintenance and repair. ``Maintenance and repair'' involves the 
exchange of information between telecommunications carriers where one 
initiates a request for maintenance or repair of existing products and 
services or unbundled network elements or combination thereof from the 
other with attendant acknowledgements and status reports.
    Meet point. A ``meet point'' is a point of interconnection between 
two networks, designated by two telecommunications carriers, at which 
one carrier's responsibility for service begins and the other carrier's 
responsibility ends.
    Meet point interconnection arrangement. A ``meet point 
interconnection arrangement'' is an arrangement by which each 
telecommunications carrier builds and maintains its network to a meet 
point.
    Network element. A ``network element'' is a facility or equipment 
used in the provision of a telecommunications service. Such term also 
includes, but is not limited to, features, functions, and capabilities 
that are provided by means of such facility or equipment, including but 
not limited to, subscriber numbers, databases, signaling systems, and 
information sufficient for billing and collection or used in the 
transmission, routing, or other provision of a telecommunications 
service.
    Operator services. ``Operator services'' are any automatic or live 
assistance to a consumer to arrange for billing or completion of a 
telephone call. Such services include, but are not limited to, busy 
line verification, emergency interrupt, and operator-assisted directory 
assistance services.
    Physical collocation. ``Physical collocation'' is an offering by an 
incumbent LEC that enables a requesting telecommunications carrier to:
    (1) Place its own equipment to be used for interconnection or 
access to unbundled network elements within or upon an incumbent LEC's 
premises;
    (2) Use such equipment to interconnect with an incumbent LEC's 
network facilities for the transmission and routing of telephone 
exchange service, exchange access service, or both, or to gain access 
to an incumbent LEC's unbundled network elements for the provision of a 
telecommunications service;
    (3) Enter those premises, subject to reasonable terms and 
conditions, to install, maintain, and repair equipment necessary for 
interconnection or access to unbundled elements; and
    (4) Obtain reasonable amounts of space in an incumbent LEC's 
premises, as provided in this part, for the equipment necessary for 
interconnection or access to unbundled elements, allocated on a first-
come, first-served basis.
    Premises. ``Premises'' refers to an incumbent LEC's central offices 
and serving wire centers, as well as all buildings or similar 
structures owned or leased by an incumbent LEC that house its network 
facilities, and all structures that house incumbent LEC facilities on 
public rights-of-way, including but not limited to vaults containing 
loop concentrators or similar structures.
    Pre-ordering and ordering. ``Pre-ordering and ordering'' includes 
the exchange of information between telecommunications carriers about 
current or proposed customer products and services or unbundled network 
elements or some combination thereof.
    Provisioning. ``Provisioning'' involves the exchange of information 
between telecommunications carriers where one executes a request for a 
set of products and services or unbundled network elements or 
combination thereof from the other with attendant acknowledgements and 
status reports.
    Rural telephone company. A ``rural telephone company'' is a LEC 
operating entity to the extent that such entity:
    (1) Provides common carrier service to any local exchange carrier 
study area that does not include either:
    (i) Any incorporated place of 10,000 inhabitants or more, or any 
part thereof, based on the most recently available population 
statistics of the Bureau of the Census; or
    (ii) Any territory, incorporated or unincorporated, included in an 
urbanized area, as defined by the Bureau of the Census as of August 10, 
1993;
    (2) Provides telephone exchange service, including exchange access, 
to fewer than 50,000 access lines;
    (3) Provides telephone exchange service to any local exchange 
carrier study area with fewer than 100,000 access lines; or
    (4) Has less than 15 percent of its access lines in communities of 
more than 50,000 on February 8, 1996.
    Service control point. A ``service control point'' is a computer 
database in the public switched network which contains information and 
call processing instructions needed to process and complete a telephone 
call.
    Service creation environment. A ``service creation environment'' is 
a computer containing generic call processing software that can be 
programmed to create new advanced intelligent network call processing 
services.
    Signal transfer point. A ``signal transfer point'' is a packet 
switch that acts as a routing hub for a signaling network and transfers 
messages between various points in and among signaling networks.
    State commission. A ``state commission'' means the commission, 
board, or official (by whatever name designated) which under the laws 
of any State has regulatory jurisdiction with respect to intrastate 
operations of carriers. As referenced in this part, this term may 
include the Commission if it assumes the responsibility of the state 
commission, pursuant to section 252(e)(5) of the Act. This term shall 
also include any person or persons to whom the state commission has 
delegated its authority under section 251 and 252 of the Act.
    State proceeding. A ``state proceeding'' is any administrative 
proceeding in which a state commission may approve or prescribe rates, 
terms, and conditions including, but not limited to, compulsory 
arbitration pursuant to section 252(b) of the Act, review of a Bell 
operating company statement of generally available terms pursuant to 
section 252(f) of the Act, and a proceeding to determine whether to 
approve or reject an agreement adopted by arbitration pursuant to 
section 252(e) of the Act.
    Technically feasible. Interconnection, access to unbundled network 
elements, collocation, and other methods of achieving interconnection 
or access to

[[Page 45622]]

unbundled network elements at a point in the network shall be deemed 
technically feasible absent technical or operational concerns that 
prevent the fulfillment of a request by a telecommunications carrier 
for such interconnection, access, or methods. A determination of 
technical feasibility does not include consideration of economic, 
accounting, billing, space, or site concerns, except that space and 
site concerns may be considered in circumstances where there is no 
possibility of expanding the space available. The fact that an 
incumbent LEC must modify its facilities or equipment to respond to 
such request does not determine whether satisfying such request is 
technically feasible. An incumbent LEC that claims that it cannot 
satisfy such request because of adverse network reliability impacts 
must prove to the state commission by clear and convincing evidence 
that such interconnection, access, or methods would result in specific 
and significant adverse network reliability impacts.
    Telecommunications carrier. A ``telecommunications carrier'' is any 
provider of telecommunications services, except that such term does not 
include aggregators of telecommunications services (as defined in 
section 226 of the Act). A telecommunications carrier shall be treated 
as a common carrier under the Act only to the extent that it is engaged 
in providing telecommunications services, except that the Commission 
shall determine whether the provision of fixed and mobile satellite 
service shall be treated as common carriage. This definition includes 
CMRS providers, interexchange carriers (IXCs) and, to the extent they 
are acting as telecommunications carriers, companies that provide both 
telecommunications and information services. Private Mobile Radio 
Service providers are telecommunications carriers to the extent they 
provide domestic or international telecommunications for a fee directly 
to the public.
    Virtual collocation. ``Virtual collocation'' is an offering by an 
incumbent LEC that enables a requesting telecommunications carrier to:
    (1) Designate or specify equipment to be used for interconnection 
or access to unbundled network elements to be located within or upon an 
incumbent LEC's premises, and dedicated to such telecommunications 
carrier's use;
    (2) Use such equipment to interconnect with an incumbent LEC's 
network facilities for the transmission and routing of telephone 
exchange service, exchange access service, or both, or for access to an 
incumbent LEC's unbundled network elements for the provision of a 
telecommunications service; and
    (3) Electronically monitor and control its communications channels 
terminating in such equipment.

Subpart B--Telecommunications Carriers


Sec. 51.100  General duty.

    (a) Each telecommunications carrier has the duty:
    (1) To interconnect directly or indirectly with the facilities and 
equipment of other telecommunications carriers; and
    (2) To not install network features, functions, or capabilities 
that do not comply with the guidelines and standards as provided in the 
Commission's rules or section 255 or 256 of the Act.
    (b) A telecommunication carrier that has interconnected or gained 
access under sections 251(a)(1), 251(c)(2), or 251(c)(3) of the Act, 
may offer information services through the same arrangement, so long as 
it is offering telecommunications services through the same arrangement 
as well.

Subpart C--Obligations of All Local Exchange Carriers


Sec. 51.201  Resale.

    The rules governing resale of services by an incumbent LEC are set 
forth in subpart G of this part.


Sec. 51.203  Number portability.

    The rules governing number portability are set forth in part 52, 
subpart C of this chapter.


Sec. 51.219  Access to rights of way.

    The rules governing access to rights of way are set forth in part 
1, subpart J of this chapter.


Sec. 51.221  Reciprocal compensation.

    The rules governing reciprocal compensation are set forth in 
subpart H of this part.


Sec. 51.223  Application of additional requirements.

    (a) A state may not impose the obligations set forth in section 
251(c) of the Act on a LEC that is not classified as an incumbent LEC 
as defined in section 251(h)(1) of the Act, unless the Commission 
issues an order declaring that such LECs or classes or categories of 
LECs should be treated as incumbent LECs.
    (b) A state commission, or any other interested party, may request 
that the Commission issue an order declaring that a particular LEC be 
treated as an incumbent LEC, or that a class or category of LECs be 
treated as incumbent LECs, pursuant to section 251(h)(2) of the Act.

Subpart D--Additional Obligations of Incumbent Local Exchange 
Carriers


Sec. 51.301  Duty to negotiate.

    (a) An incumbent LEC shall negotiate in good faith the terms and 
conditions of agreements to fulfill the duties established by sections 
251(b) and (c) of the Act.
    (b) A requesting telecommunications carrier shall negotiate in good 
faith the terms and conditions of agreements described in paragraph (a) 
of this section.
    (c) If proven to the Commission, an appropriate state commission, 
or a court of competent jurisdiction, the following actions or 
practices, among others, violate the duty to negotiate in good faith:
    (1) Demanding that another party sign a nondisclosure agreement 
that precludes such party from providing information requested by the 
Commission, or a state commission, or in support of a request for 
arbitration under section 252(b)(2)(B) of the Act;
    (2) Demanding that a requesting telecommunications carrier attest 
that an agreement complies with all provisions of the Act, federal 
regulations, or state law;
    (3) Refusing to include in an arbitrated or negotiated agreement a 
provision that permits the agreement to be amended in the future to 
take into account changes in Commission or state rules;
    (4) Conditioning negotiation on a requesting telecommunications 
carrier first obtaining state certifications;
    (5) Intentionally misleading or coercing another party into 
reaching an agreement that it would not otherwise have made;
    (6) Intentionally obstructing or delaying negotiations or 
resolutions of disputes;
     (7) Refusing throughout the negotiation process to designate a 
representative with authority to make binding representations, if such 
refusal significantly delays resolution of issues; and
    (8) Refusing to provide information necessary to reach agreement. 
Such refusal includes, but is not limited to:
    (i) Refusal by an incumbent LEC to furnish information about its 
network that a requesting telecommunications carrier reasonably 
requires to identify the network elements that it needs in order to 
serve a particular customer; and

[[Page 45623]]

    (ii) Refusal by a requesting telecommunications carrier to furnish 
cost data that would be relevant to setting rates if the parties were 
in arbitration.


Sec. 51.303  Preexisting agreements.

    (a) All interconnection agreements between an incumbent LEC and a 
telecommunications carrier, including those negotiated before February 
8, 1996, shall be submitted by the parties to the appropriate state 
commission for approval pursuant to section 252(e) of the Act.
    (b) Interconnection agreements negotiated before February 8, 1996, 
between Class A carriers, as defined by Sec. 32.11(a)(1) of this 
chapter, shall be filed by the parties with the appropriate state 
commission no later than June 30, 1997, or such earlier date as the 
state commission may require.
    (c) If a state commission approves a preexisting agreement, it 
shall be made available to other parties in accordance with section 
252(i) of the Act and Sec. 51.809 of this part. A state commission may 
reject a preexisting agreement on the grounds that it is inconsistent 
with the public interest, or for other reasons set forth in section 
252(e)(2)(A) of the Act.


Sec. 51.305  Interconnection.

    (a) An incumbent LEC shall provide, for the facilities and 
equipment of any requesting telecommunications carrier, interconnection 
with the incumbent LEC's network:
    (1) For the transmission and routing of telephone exchange traffic, 
exchange access traffic, or both;
    (2) At any technically feasible point within the incumbent LEC's 
network including, at a minimum:
    (i) The line-side of a local switch;
    (ii) The trunk-side of a local switch;
    (iii) The trunk interconnection points for a tandem switch;
    (iv) Central office cross-connect points;
    (v) Out-of-band signaling transfer points necessary to exchange 
traffic at these points and access call-related databases; and
    (vi) The points of access to unbundled network elements as 
described in Sec. 51.319;
    (3) That is at a level of quality that is equal to that which the 
incumbent LEC provides itself, a subsidiary, an affiliate, or any other 
party, except as provided in paragraph (4) of this section. At a 
minimum, this requires an incumbent LEC to design interconnection 
facilities to meet the same technical criteria and service standards 
that are used within the incumbent LEC's network. This obligation is 
not limited to a consideration of service quality as perceived by end 
users, and includes, but is not limited to, service quality as 
perceived by the requesting telecommunications carrier;
    (4) That, if so requested by a telecommunications carrier and to 
the extent technically feasible, is superior in quality to that 
provided by the incumbent LEC to itself or to any subsidiary, 
affiliate, or any other party to which the incumbent LEC provides 
interconnection. Nothing in this section prohibits an incumbent LEC 
from providing interconnection that is lesser in quality at the sole 
request of the requesting telecommunications carrier; and
    (5) On terms and conditions that are just, reasonable, and 
nondiscriminatory in accordance with the terms and conditions of any 
agreement, the requirements of sections 251 and 252 of the Act, and the 
Commission's rules including, but not limited to, offering such terms 
and conditions equally to all requesting telecommunications carriers, 
and offering such terms and conditions that are no less favorable than 
the terms and conditions upon which the incumbent LEC provides such 
interconnection to itself. This includes, but is not limited to, the 
time within which the incumbent LEC provides such interconnection.
    (b) A carrier that requests interconnection solely for the purpose 
of originating or terminating its interexchange traffic on an incumbent 
LEC's network and not for the purpose of providing to others telephone 
exchange service, exchange access service, or both, is not entitled to 
receive interconnection pursuant to section 251(c)(2) of the Act.
    (c) Previous successful interconnection at a particular point in a 
network, using particular facilities, constitutes substantial evidence 
that interconnection is technically feasible at that point, or at 
substantially similar points, in networks employing substantially 
similar facilities. Adherence to the same interface or protocol 
standards shall constitute evidence of the substantial similarity of 
network facilities.
    (d) Previous successful interconnection at a particular point in a 
network at a particular level of quality constitutes substantial 
evidence that interconnection is technically feasible at that point, or 
at substantially similar points, at that level of quality.
    (e) An incumbent LEC that denies a request for interconnection at a 
particular point must prove to the state commission that 
interconnection at that point is not technically feasible.
    (f) If technically feasible, an incumbent LEC shall provide two-way 
trunking upon request.


Sec. 51.307  Duty to provide access on an unbundled basis to network 
elements.

    (a) An incumbent LEC shall provide, to a requesting 
telecommunications carrier for the provision of a telecommunications 
service, nondiscriminatory access to network elements on an unbundled 
basis at any technically feasible point on terms and conditions that 
are just, reasonable, and nondiscriminatory in accordance with the 
terms and conditions of any agreement, the requirements of sections 251 
and 252 of the Act, and the Commission's rules.
    (b) The duty to provide access to unbundled network elements 
pursuant to section 251(c)(3) of the Act includes a duty to provide a 
connection to an unbundled network element independent of any duty to 
provide interconnection pursuant to this part and section 251(c)(2) of 
the Act.
    (c) An incumbent LEC shall provide a requesting telecommunications 
carrier access to an unbundled network element, along with all of the 
unbundled network element's features, functions, and capabilities, in a 
manner that allows the requesting telecommunications carrier to provide 
any telecommunications service that can be offered by means of that 
network element.
    (d) An incumbent LEC shall provide a requesting telecommunications 
carrier access to the facility or functionality of a requested network 
element separate from access to the facility or functionality of other 
network elements, for a separate charge.


Sec. 51.309  Use of unbundled network elements.

    (a) An incumbent LEC shall not impose limitations, restrictions, or 
requirements on requests for, or the use of, unbundled network elements 
that would impair the ability of a requesting telecommunications 
carrier to offer a telecommunications service in the manner the 
requesting telecommunications carrier intends.
    (b) A telecommunications carrier purchasing access to an unbundled 
network element may use such network element to provide exchange access 
services to itself in order to provide interexchange services to 
subscribers.
    (c) A telecommunications carrier purchasing access to an unbundled 
network facility is entitled to exclusive use of that facility for a 
period of time,

[[Page 45624]]

or when purchasing access to a feature, function, or capability of a 
facility, a telecommunications carrier is entitled to use of that 
feature, function, or capability for a period of time. A 
telecommunications carrier's purchase of access to an unbundled network 
element does not relieve the incumbent LEC of the duty to maintain, 
repair, or replace the unbundled network element.


Sec. 51.311  Nondiscriminatory access to unbundled network elements.

    (a) The quality of an unbundled network element, as well as the 
quality of the access to the unbundled network element, that an 
incumbent LEC provides to a requesting telecommunications carrier shall 
be the same for all telecommunications carriers requesting access to 
that network element, except as provided in paragraph (c) of this 
section.
    (b) Except as provided in paragraph (c) of this section, to the 
extent technically feasible, the quality of an unbundled network 
element, as well as the quality of the access to such unbundled network 
element, that an incumbent LEC provides to a requesting 
telecommunications carrier shall be at least equal in quality to that 
which the incumbent LEC provides to itself. If an incumbent LEC fails 
to meet this requirement, the incumbent LEC must prove to the state 
commission that it is not technically feasible to provide the requested 
unbundled network element, or to provide access to the requested 
unbundled network element, at a level of quality that is equal to that 
which the incumbent LEC provides to itself.
    (c) To the extent technically feasible, the quality of an unbundled 
network element, as well as the quality of the access to such unbundled 
network element, that an incumbent LEC provides to a requesting 
telecommunications carrier shall, upon request, be superior in quality 
to that which the incumbent LEC provides to itself. If an incumbent LEC 
fails to meet this requirement, the incumbent LEC must prove to the 
state commission that it is not technically feasible to provide the 
requested unbundled network element or access to such unbundled network 
element at the requested level of quality that is superior to that 
which the incumbent LEC provides to itself. Nothing in this section 
prohibits an incumbent LEC from providing interconnection that is 
lesser in quality at the sole request of the requesting 
telecommunications carrier.
    (d) Previous successful access to an unbundled element at a 
particular point in a network, using particular facilities, is 
substantial evidence that access is technically feasible at that point, 
or at substantially similar points, in networks employing substantially 
similar facilities. Adherence to the same interface or protocol 
standards shall constitute evidence of the substantial similarity of 
network facilities.
    (e) Previous successful provision of access to an unbundled element 
at a particular point in a network at a particular level of quality is 
substantial evidence that access is technically feasible at that point, 
or at substantially similar points, at that level of quality.


Sec. 51.313  Just, reasonable and nondiscriminatory terms and 
conditions for the provision of unbundled network elements.

    (a) The terms and conditions pursuant to which an incumbent LEC 
provides access to unbundled network elements shall be offered equally 
to all requesting telecommunications carriers.
    (b) Where applicable, the terms and conditions pursuant to which an 
incumbent LEC offers to provide access to unbundled network elements, 
including but not limited to, the time within which the incumbent LEC 
provisions such access to unbundled network elements, shall, at a 
minimum, be no less favorable to the requesting carrier than the terms 
and conditions under which the incumbent LEC provides such elements to 
itself.
    (c) An incumbent LEC must provide a carrier purchasing access to 
unbundled network elements with the pre-ordering, ordering, 
provisioning, maintenance and repair, and billing functions of the 
incumbent LEC's operations support systems.


Sec. 51.315  Combination of unbundled network elements.

    (a) An incumbent LEC shall provide unbundled network elements in a 
manner that allows requesting telecommunications carriers to combine 
such network elements in order to provide a telecommunications service.
    (b) Except upon request, an incumbent LEC shall not separate 
requested network elements that the incumbent LEC currently combines.
    (c) Upon request, an incumbent LEC shall perform the functions 
necessary to combine unbundled network elements in any manner, even if 
those elements are not ordinarily combined in the incumbent LEC's 
network, provided that such combination is:
    (1) Technically feasible; and
    (2) Would not impair the ability of other carriers to obtain access 
to unbundled network elements or to interconnect with the incumbent 
LEC's network.
    (d) Upon request, an incumbent LEC shall perform the functions 
necessary to combine unbundled network elements with elements possessed 
by the requesting telecommunications carrier in any technically 
feasible manner.
    (e) An incumbent LEC that denies a request to combine elements 
pursuant to paragraph (c)(1) or paragraph (d) of this section must 
prove to the state commission that the requested combination is not 
technically feasible.
    (f) An incumbent LEC that denies a request to combine elements 
pursuant to paragraph (c)(2) of this section must prove to the state 
commission that the requested combination would impair the ability of 
other carriers to obtain access to unbundled network elements or to 
interconnect with the incumbent LEC's network.


Sec. 51.317  Standards for identifying network elements to be made 
available.

    (a) In determining what network elements should be made available 
for purposes of section 251(c)(3) of the Act beyond those identified in 
Sec. 51.319, a state commission shall first determine whether it is 
technically feasible for the incumbent LEC to provide access to a 
network element on an unbundled basis.
    (b) If the state commission determines that it is technically 
feasible for the incumbent LEC to provide access to the network element 
on an unbundled basis, the state commission may decline to require 
unbundling of the network element only if:
     (1) The state commission concludes that:
     (i) The network element is proprietary, or contains proprietary 
information that will be revealed if the network element is provided on 
an unbundled basis; and
     (ii) A requesting telecommunications carrier could offer the same 
proposed telecommunications service through the use of other, 
nonproprietary unbundled network elements within the incumbent LEC's 
network; or
     (2) The state commission concludes that the failure of the 
incumbent LEC to provide access to the network element would not 
decrease the quality of, and would not increase the financial or 
administrative cost of, the telecommunications service a requesting 
telecommunications carrier seeks to offer, compared with providing that 
service over other unbundled network elements in the incumbent LEC's 
network.


Sec. 51.319  Specific unbundling requirements.

    An incumbent LEC shall provide nondiscriminatory access in 
accordance

[[Page 45625]]

with Sec. 51.311 and section 251(c)(3) of the Act to the following 
network elements on an unbundled basis to any requesting 
telecommunications carrier for the provision of a telecommunications 
service:
    (a) Local Loop. The local loop network element is defined as a 
transmission facility between a distribution frame (or its equivalent) 
in an incumbent LEC central office and an end user customer premises.
    (b) Network Interface Device.
     (1) The network interface device network element is defined as a 
cross-connect device used to connect loop facilities to inside wiring.
     (2) An incumbent LEC shall permit a requesting telecommunications 
carrier to connect its own local loops to the inside wiring of premises 
through the incumbent LEC's network interface device. The requesting 
telecommunications carrier shall establish this connection through an 
adjoining network interface device deployed by such telecommunications 
carrier.
    (c) Switching Capability.
    (1) Local Switching Capability.
     (i) The local switching capability network element is defined as:
     (A) Line-side facilities, which include, but are not limited to, 
the connection between a loop termination at a main distribution frame 
and a switch line card;
    (B) Trunk-side facilities, which include, but are not limited to, 
the connection between trunk termination at a trunk-side cross-connect 
panel and a switch trunk card; and
     (C) All features, functions, and capabilities of the switch, which 
include, but are not limited to:
     (1) The basic switching function of connecting lines to lines, 
lines to trunks, trunks to lines, and trunks to trunks, as well as the 
same basic capabilities made available to the incumbent LEC's 
customers, such as a telephone number, white page listing, and dial 
tone; and
     (2) All other features that the switch is capable of providing, 
including but not limited to custom calling, custom local area 
signaling service features, and Centrex, as well as any technically 
feasible customized routing functions provided by the switch.
     (ii) An incumbent LEC shall transfer a customer's local service to 
a competing carrier within a time period no greater than the interval 
within which the incumbent LEC currently transfers end users between 
interexchange carriers, if such transfer requires only a change in the 
incumbent LEC's software;
     (2) Tandem Switching Capability. The tandem switching capability 
network element is defined as:
     (i) Trunk-connect facilities, including but not limited to the 
connection between trunk termination at a cross-connect panel and a 
switch trunk card;
     (ii) The basic switching function of connecting trunks to trunks; 
and
     (iii) The functions that are centralized in tandem switches (as 
distinguished from separate end-office switches), including but not 
limited to call recording, the routing of calls to operator services, 
and signaling conversion features.
    (d) Interoffice Transmission Facilities.
     (1) Interoffice transmission facilities are defined as incumbent 
LEC transmission facilities dedicated to a particular customer or 
carrier, or shared by more than one customer or carrier, that provide 
telecommunications between wire centers owned by incumbent LECs or 
requesting telecommunications carriers, or between switches owned by 
incumbent LECs or requesting telecommunications carriers.
     (2) The incumbent LEC shall:
     (i) Provide a requesting telecommunications carrier exclusive use 
of interoffice transmission facilities dedicated to a particular 
customer or carrier, or use of the features, functions, and 
capabilities of interoffice transmission facilities shared by more than 
one customer or carrier;
     (ii) Provide all technically feasible transmission facilities, 
features, functions, and capabilities that the requesting 
telecommunications carrier could use to provide telecommunications 
services;
     (iii) Permit, to the extent technically feasible, a requesting 
telecommunications carrier to connect such interoffice facilities to 
equipment designated by the requesting telecommunications carrier, 
including, but not limited to, the requesting telecommunications 
carrier's collocated facilities; and
     (iv) Permit, to the extent technically feasible, a requesting 
telecommunications carrier to obtain the functionality provided by the 
incumbent LEC's digital cross-connect systems in the same manner that 
the incumbent LEC provides such functionality to interexchange 
carriers.
    (e) Signaling Networks and Call-Related Databases.
     (1) Signaling Networks.
     (i) Signaling networks include, but are not limited to, signaling 
links and signaling transfer points.
     (ii) When a requesting telecommunications carrier purchases 
unbundled switching capability from an incumbent LEC, the incumbent LEC 
shall provide access to its signaling network from that switch in the 
same manner in which it obtains such access itself.
     (iii) An incumbent LEC shall provide a requesting 
telecommunications carrier with its own switching facilities access to 
the incumbent LEC's signaling network for each of the requesting 
telecommunications carrier's switches. This connection shall be made in 
the same manner as an incumbent LEC connects one of its own switches to 
a signal transfer point.
     (iv) An incumbent LEC is not required to unbundle those signaling 
links that connect service control points to switching transfer points 
or to permit a requesting telecommunications carrier to link its own 
signal transfer points directly to the incumbent LEC's switch or call-
related databases;
     (2) Call-Related Databases.
     (i) Call-related databases are defined as databases, other than 
operations support systems, that are used in signaling networks for 
billing and collection or the transmission, routing, or other provision 
of a telecommunications service.
     (ii) For purposes of switch query and database response through a 
signaling network, an incumbent LEC shall provide access to its call-
related databases, including, but not limited to, the Line Information 
Database, Toll Free Calling database, downstream number portability 
databases, and Advanced Intelligent Network databases, by means of 
physical access at the signaling transfer point linked to the unbundled 
database.
     (iii) An incumbent LEC shall allow a requesting telecommunications 
carrier that has purchased an incumbent LEC's local switching 
capability to use the incumbent LEC's service control point element in 
the same manner, and via the same signaling links, as the incumbent LEC 
itself.
     (iv) An incumbent LEC shall allow a requesting telecommunications 
carrier that has deployed its own switch, and has linked that switch to 
an incumbent LEC's signaling system, to gain access to the incumbent 
LEC's service control point in a manner that allows the requesting 
carrier to provide any call-related, database-supported services to 
customers served by the requesting telecommunications carrier's switch.
     (v) A state commission shall consider whether mechanisms mediating 
access to an incumbent LEC's Advanced Intelligent Network service 
control points are necessary, and if so, whether they will adequately 
safeguard against intentional or unintentional misuse of

[[Page 45626]]

the incumbent LEC's Advanced Intelligent Network facilities.
     (vi) An incumbent LEC shall provide a requesting 
telecommunications carrier with access to call-related databases in a 
manner that complies with section 222 of the Act;
     (3) Service Management Systems.
     (i) A service management system is defined as a computer database 
or system not part of the public switched network that, among other 
things:
     (A) Interconnects to the service control point and sends to that 
service control point the information and call processing instructions 
needed for a network switch to process and complete a telephone call; 
and
     (B) Provides telecommunications carriers with the capability of 
entering and storing data regarding the processing and completing of a 
telephone call.
     (ii) An incumbent LEC shall provide a requesting 
telecommunications carrier with the information necessary to enter 
correctly, or format for entry, the information relevant for input into 
the particular incumbent LEC service management system.
     (iii) An incumbent LEC shall provide a requesting 
telecommunications carrier the same access to design, create, test, and 
deploy Advanced Intelligent Network-based services at the service 
management system, through a service creation environment, that the 
incumbent LEC provides to itself.
     (iv) A state commission shall consider whether mechanisms 
mediating access to Advanced Intelligent Network service management 
systems and service creation environments are necessary, and if so, 
whether they will adequately safeguard against intentional or 
unintentional misuse of the incumbent LEC's Advanced Intelligent 
Network facilities.
     (v) An incumbent LEC shall provide a requesting telecommunications 
carrier access to service management systems in a manner that complies 
with section 222 of the Act.
    (f) Operations Support Systems Functions.
     (1) Operations support systems functions consist of pre-ordering, 
ordering, provisioning, maintenance and repair, and billing functions 
supported by an incumbent LEC's databases and information.
    (2) An incumbent LEC that does not currently comply with this 
requirement shall do so as expeditiously as possible, but, in any 
event, no later than January 1, 1997.
    (g) Operator Services and Directory Assistance. An incumbent LEC 
shall provide access to operator service and directory assistance 
facilities where technically feasible.


Sec. 51.321  Methods of obtaining interconnection and access to 
unbundled elements under section 251 of the Act.

    (a) Except as provided in paragraph (e) of this section, an 
incumbent LEC shall provide, on terms and conditions that are just, 
reasonable, and nondiscriminatory in accordance with the requirements 
of this part, any technically feasible method of obtaining 
interconnection or access to unbundled network elements at a particular 
point upon a request by a telecommunications carrier.
    (b) Technically feasible methods of obtaining interconnection or 
access to unbundled network elements include, but are not limited to:
    (1) Physical collocation and virtual collocation at the premises of 
an incumbent LEC; and
    (2) Meet point interconnection arrangements.
    (c) A previously successful method of obtaining interconnection or 
access to unbundled network elements at a particular premises or point 
on an incumbent LEC's network is substantial evidence that such method 
is technically feasible in the case of substantially similar network 
premises or points.
    (d) An incumbent LEC that denies a request for a particular method 
of obtaining interconnection or access to unbundled network elements on 
the incumbent LEC's network must prove to the state commission that the 
requested method of obtaining interconnection or access to unbundled 
network elements at that point is not technically feasible.
    (e) An incumbent LEC shall not be required to provide for physical 
collocation of equipment necessary for interconnection or access to 
unbundled network elements at the incumbent LEC's premises if it 
demonstrates to the state commission that physical collocation is not 
practical for technical reasons or because of space limitations. In 
such cases, the incumbent LEC shall be required to provide virtual 
collocation, except at points where the incumbent LEC proves to the 
state commission that virtual collocation is not technically feasible. 
If virtual collocation is not technically feasible, the incumbent LEC 
shall provide other methods of interconnection and access to unbundled 
network elements to the extent technically feasible.
    (f) An incumbent LEC shall submit to the state commission detailed 
floor plans or diagrams of any premises where the incumbent LEC claims 
that physical collocation is not practical because of space 
limitations.
    (g) An incumbent LEC that is classified as a Class A company under 
Sec. 32.11 of this chapter and that is not a National Exchange Carrier 
Association interstate tariff participant as provided in part 69, 
subpart G, shall continue to provide expanded interconnection service 
pursuant to interstate tariff in accordance with Secs. 64.1401, 
64.1402, 69.121 of this chapter, and the Commission's other 
requirements.


Sec. 51.323  Standards for physical collocation and virtual 
collocation.

    (a) An incumbent LEC shall provide physical collocation and virtual 
collocation to requesting telecommunications carriers.
    (b) An incumbent LEC shall permit the collocation of any type of 
equipment used for interconnection or access to unbundled network 
elements. Whenever an incumbent LEC objects to collocation of equipment 
by a requesting telecommunications carrier for purposes within the 
scope of section 251(c)(6) of the Act, the incumbent LEC shall prove to 
the state commission that the equipment will not be actually used by 
the telecommunications carrier for the purpose of obtaining 
interconnection or access to unbundled network elements. Equipment used 
for interconnection and access to unbundled network elements includes, 
but is not limited to:
    (1) Transmission equipment including, but not limited to, optical 
terminating equipment and multiplexers; and
    (2) Equipment being collocated to terminate basic transmission 
facilities pursuant to Secs. 64.1401 and 64.1402 of this chapter as of 
August 1, 1996.
    (c) Nothing in this section requires an incumbent LEC to permit 
collocation of switching equipment or equipment used to provide 
enhanced services.
    (d) When an incumbent LEC provides physical collocation, virtual 
collocation, or both, the incumbent LEC shall:
    (1) Provide an interconnection point or points, physically 
accessible by both the incumbent LEC and the collocating 
telecommunications carrier, at which the fiber optic cable carrying an 
interconnector's circuits can enter the incumbent LEC's premises, 
provided that the incumbent LEC shall designate interconnection points 
as close as reasonably possible to its premises;
    (2) Provide at least two such interconnection points at each 
incumbent LEC premises at which there are at least two entry points for 
the incumbent LEC's cable facilities, and at which space is available 
for new

[[Page 45627]]

facilities in at least two of those entry points;
    (3) Permit interconnection of copper or coaxial cable if such 
interconnection is first approved by the state commission; and
    (4) Permit physical collocation of microwave transmission 
facilities except where such collocation is not practical for technical 
reasons or because of space limitations, in which case virtual 
collocation of such facilities is required where technically feasible.
    (e) When providing virtual collocation, an incumbent LEC shall, at 
a minimum, install, maintain, and repair collocated equipment 
identified in paragraph (b) of this section within the same time 
periods and with failure rates that are no greater than those that 
apply to the performance of similar functions for comparable equipment 
of the incumbent LEC itself.
    (f) An incumbent LEC shall allocate space for the collocation of 
the equipment identified in paragraph (b) of this section in accordance 
with the following requirements:
    (1) An incumbent LEC shall make space available within or on its 
premises to requesting telecommunications carriers on a first-come, 
first-served basis, provided, however, that the incumbent LEC shall not 
be required to lease or construct additional space to provide for 
physical collocation when existing space has been exhausted;
    (2) To the extent possible, an incumbent LEC shall make contiguous 
space available to requesting telecommunications carriers that seek to 
expand their existing collocation space;
    (3) When planning renovations of existing facilities or 
constructing or leasing new facilities, an incumbent LEC shall take 
into account projected demand for collocation of equipment;
    (4) An incumbent LEC may retain a limited amount of floor space for 
its own specific future uses, provided, however, that the incumbent LEC 
may not reserve space for future use on terms more favorable than those 
that apply to other telecommunications carriers seeking to reserve 
collocation space for their own future use;
    (5) An incumbent LEC shall relinquish any space held for future use 
before denying a request for virtual collocation on the grounds of 
space limitations, unless the incumbent LEC proves to the state 
commission that virtual collocation at that point is not technically 
feasible; and
    (6) An incumbent LEC may impose reasonable restrictions on the 
warehousing of unused space by collocating telecommunications carriers, 
provided, however, that the incumbent LEC shall not set maximum space 
limitations applicable to such carriers unless the incumbent LEC proves 
to the state commission that space constraints make such restrictions 
necessary.
    (g) An incumbent LEC shall permit collocating telecommunications 
carriers to collocate equipment and connect such equipment to unbundled 
network transmission elements obtained from the incumbent LEC, and 
shall not require such telecommunications carriers to bring their own 
transmission facilities to the incumbent LEC's premises in which they 
seek to collocate equipment.
    (h) An incumbent LEC shall permit a collocating telecommunications 
carrier to interconnect its network with that of another collocating 
telecommunications carrier at the incumbent LEC's premises and to 
connect its collocated equipment to the collocated equipment of another 
telecommunications carrier within the same premises provided that the 
collocated equipment is also used for interconnection with the 
incumbent LEC or for access to the incumbent LEC's unbundled network 
elements.
    (1) An incumbent LEC shall provide the connection between the 
equipment in the collocated spaces of two or more telecommunications 
carriers, unless the incumbent LEC permits one or more of the 
collocating parties to provide this connection for themselves; and
    (2) An incumbent LEC is not required to permit collocating 
telecommunications carriers to place their own connecting transmission 
facilities within the incumbent LEC's premises outside of the actual 
physical collocation space.
    (i) An incumbent LEC may require reasonable security arrangements 
to separate a collocating telecommunications carrier's space from the 
incumbent LEC's facilities.
    (j) An incumbent LEC shall permit a collocating telecommunications 
carrier to subcontract the construction of physical collocation 
arrangements with contractors approved by the incumbent LEC, provided, 
however, that the incumbent LEC shall not unreasonably withhold 
approval of contractors. Approval by an incumbent LEC shall be based on 
the same criteria it uses in approving contractors for its own 
purposes.

Subpart E--Exemptions, Suspensions, and Modifications of 
Requirements of Section 251 of the Act


Sec. 51.401  State authority.

    A state commission shall determine whether a telephone company is 
entitled, pursuant to section 251(f) of the Act, to exemption from, or 
suspension or modification of, the requirements of section 251 of the 
Act. Such determinations shall be made on a case-by-case basis.


Sec. 51.403  Carriers eligible for suspension or modification under 
section 251(f)(2) of the Act.

    A LEC is not eligible for a suspension or modification of the 
requirements of section 251(b) or section 251(c) of the Act pursuant to 
section 251(f)(2) of the Act if such LEC, at the holding company level, 
has two percent or more of the subscriber lines installed in the 
aggregate nationwide.


Sec. 51.405  Burden of proof.

    (a) Upon receipt of a bona fide request for interconnection, 
services, or access to unbundled network elements, a rural telephone 
company must prove to the state commission that the rural telephone 
company should be entitled, pursuant to section 251(f)(1) of the Act, 
to continued exemption from the requirements of section 251(c) of the 
Act.
    (b) A LEC with fewer than two percent of the nation's subscriber 
lines installed in the aggregate nationwide must prove to the state 
commission, pursuant to section 251(f)(2) of the Act, that it is 
entitled to a suspension or modification of the application of a 
requirement or requirements of section 251(b) or 251(c) of the Act.
    (c) In order to justify continued exemption under section 251(f)(1) 
of the Act once a bona fide request has been made, an incumbent LEC 
must offer evidence that the application of the requirements of section 
251(c) of the Act would be likely to cause undue economic burden beyond 
the economic burden that is typically associated with efficient 
competitive entry.
    (d) In order to justify a suspension or modification under section 
251(f)(2) of the Act, a LEC must offer evidence that the application of 
section 251(b) or section 251(c) of the Act would be likely to cause 
undue economic burden beyond the economic burden that is typically 
associated with efficient competitive entry.

Subpart F--Pricing of Elements


Sec. 51.501  Scope.

    (a) The rules in this subpart apply to the pricing of network 
elements, interconnection, and methods of obtaining access to unbundled 
elements, including physical collocation and virtual collocation.
    (b) As used in this subpart, the term ``element'' includes network 
elements,

[[Page 45628]]

interconnection, and methods of obtaining interconnection and access to 
unbundled elements.


Sec. 51.503  General pricing standard.

    (a) An incumbent LEC shall offer elements to requesting 
telecommunications carriers at rates, terms, and conditions that are 
just, reasonable, and nondiscriminatory.
    (b) An incumbent LEC's rates for each element it offers shall 
comply with the rate structure rules set forth in Secs. 51.507 and 
51.509, and shall be established, at the election of the state 
commission--
    (1) Pursuant to the forward-looking economic cost-based pricing 
methodology set forth in Secs. 51.505 and 51.511; or
    (2) Consistent with the proxy ceilings and ranges set forth in 
Sec. 51.513.
    (c) The rates that an incumbent LEC assesses for elements shall not 
vary on the basis of the class of customers served by the requesting 
carrier, or on the type of services that the requesting carrier 
purchasing such elements uses them to provide.


Sec. 51.505  Forward-looking economic cost.

    (a) In general. The forward-looking economic cost of an element 
equals the sum of:
    (1) The total element long-run incremental cost of the element, as 
described in paragraph (b); and
    (2) A reasonable allocation of forward-looking common costs, as 
described in paragraph (c).
    (b) Total element long-run incremental cost. The total element 
long-run incremental cost of an element is the forward-looking cost 
over the long run of the total quantity of the facilities and functions 
that are directly attributable to, or reasonably identifiable as 
incremental to, such element, calculated taking as a given the 
incumbent LEC's provision of other elements.
    (1) Efficient network configuration. The total element long-run 
incremental cost of an element should be measured based on the use of 
the most efficient telecommunications technology currently available 
and the lowest cost network configuration, given the existing location 
of the incumbent LEC's wire centers.
    (2) Forward-looking cost of capital. The forward-looking cost of 
capital shall be used in calculating the total element long-run 
incremental cost of an element.
    (3) Depreciation rates. The depreciation rates used in calculating 
forward-looking economic costs of elements shall be economic 
depreciation rates.
    (c) Reasonable allocation of forward-looking common costs.
    (1) Forward-looking common costs. Forward-looking common costs are 
economic costs efficiently incurred in providing a group of elements or 
services (which may include all elements or services provided by the 
incumbent LEC) that cannot be attributed directly to individual 
elements or services.
    (2) Reasonable allocation.
    (i) The sum of a reasonable allocation of forward-looking common 
costs and the total element long-run incremental cost of an element 
shall not exceed the stand-alone costs associated with the element. In 
this context, stand-alone costs are the total forward-looking costs, 
including corporate costs, that would be incurred to produce a given 
element if that element were provided by an efficient firm that 
produced nothing but the given element.
    (ii) The sum of the allocation of forward-looking common costs for 
all elements and services shall equal the total forward-looking common 
costs, exclusive of retail costs, attributable to operating the 
incumbent LEC's total network, so as to provide all the elements and 
services offered.
    (d) Factors that may not be considered. The following factors shall 
not be considered in a calculation of the forward-looking economic cost 
of an element:
    (1) Embedded costs. Embedded costs are the costs that the incumbent 
LEC incurred in the past and that are recorded in the incumbent LEC's 
books of accounts;
    (2) Retail costs. Retail costs include the costs of marketing, 
billing, collection, and other costs associated with offering retail 
telecommunications services to subscribers who are not 
telecommunications carriers, described in Sec. 51.609;
    (3) Opportunity costs. Opportunity costs include the revenues that 
the incumbent LEC would have received for the sale of 
telecommunications services, in the absence of competition from 
telecommunications carriers that purchase elements; and
    (4) Revenues to subsidize other services. Revenues to subsidize 
other services include revenues associated with elements or 
telecommunications service offerings other than the element for which a 
rate is being established.
    (e) Cost study requirements. An incumbent LEC must prove to the 
state commission that the rates for each element it offers do not 
exceed the forward-looking economic cost per unit of providing the 
element, using a cost study that complies with the methodology set 
forth in this section and Sec. 51.511.
    (1) A state commission may set a rate outside the proxy ranges or 
above the proxy ceilings described in Sec. 51.513 only if that 
commission has given full and fair effect to the economic cost based 
pricing methodology described in this section and Sec. 51.511 in a 
state proceeding that meets the requirements of paragraph (e)(2) of 
this section.
    (2) Any state proceeding conducted pursuant to this section shall 
provide notice and an opportunity for comment to affected parties and 
shall result in the creation of a written factual record that is 
sufficient for purposes of review. The record of any state proceeding 
in which a state commission considers a cost study for purposes of 
establishing rates under this section shall include any such cost 
study.


Sec. 51.507  General rate structure standard.

    (a) Element rates shall be structured consistently with the manner 
in which the costs of providing the elements are incurred.
    (b) The costs of dedicated facilities shall be recovered through 
flat-rated charges.
    (c) The costs of shared facilities shall be recovered in a manner 
that efficiently apportions costs among users. Costs of shared 
facilities may be apportioned either through usage-sensitive charges or 
capacity-based flat-rated charges, if the state commission finds that 
such rates reasonably reflect the costs imposed by the various users.
    (d) Recurring costs shall be recovered through recurring charges, 
unless an incumbent LEC proves to a state commission that such 
recurring costs are de minimis. Recurring costs shall be considered de 
minimis when the costs of administering the recurring charge would be 
excessive in relation to the amount of the recurring costs.
    (e) State commissions may, where reasonable, require incumbent LECs 
to recover nonrecurring costs through recurring charges over a 
reasonable period of time. Nonrecurring charges shall be allocated 
efficiently among requesting telecommunications carriers, and shall not 
permit an incumbent LEC to recover more than the total forward-looking 
economic cost of providing the applicable element.
    (f) State commissions shall establish different rates for elements 
in at least three defined geographic areas within the state to reflect 
geographic cost differences.
    (1) To establish geographically-deaveraged rates, state commissions 
may use existing density-related zone pricing plans described in 
Sec. 69.123 of this chapter, or other such cost-related

[[Page 45629]]

zone plans established pursuant to state law.
    (2) In states not using such existing plans, state commissions must 
create a minimum of three cost-related rate zones.


Sec. 51.509  Rate structure standards for specific elements.

    In addition to the general rules set forth in Sec. 51.507, rates 
for specific elements shall comply with the following rate structure 
rules.
    (a) Local loops. Loop costs shall be recovered through flat-rated 
charges.
    (b) Local switching. Local switching costs shall be recovered 
through a combination of a flat-rated charge for line ports and one or 
more flat-rated or per-minute usage charges for the switching matrix 
and for trunk ports.
    (c) Dedicated transmission links. Dedicated transmission link costs 
shall be recovered through flat-rated charges.
    (d) Shared transmission facilities between tandem switches and end 
offices. The costs of shared transmission facilities between tandem 
switches and end offices may be recovered through usage-sensitive 
charges, or in another manner consistent with the manner that the 
incumbent LEC incurs those costs.
    (e) Tandem switching. Tandem switching costs may be recovered 
through usage-sensitive charges, or in another manner consistent with 
the manner that the incumbent LEC incurs those costs.
    (f) Signaling and call-related database services. Signaling and 
call-related database service costs shall be usage-sensitive, based on 
either the number of queries or the number of messages, with the 
exception of the dedicated circuits known as signaling links, the cost 
of which shall be recovered through flat-rated charges.
    (g) Collocation. Collocation costs shall be recovered consistent 
with the rate structure policies established in the Expanded 
Interconnection proceeding, CC Docket No. 91-141.


Sec. 51.511  Forward-looking economic cost per unit.

    (a) The forward-looking economic cost per unit of an element equals 
the forward-looking economic cost of the element, as defined in 
Sec. 51.505, divided by a reasonable projection of the sum of the total 
number of units of the element that the incumbent LEC is likely to 
provide to requesting telecommunications carriers and the total number 
of units of the element that the incumbent LEC is likely to use in 
offering its own services, during a reasonable measuring period.
    (b)(1) With respect to elements that an incumbent LEC offers on a 
flat-rate basis, the number of units is defined as the discrete number 
of elements (e.g., local loops or local switch ports) that the 
incumbent LEC uses or provides.
    (2) With respect to elements that an incumbent LEC offers on a 
usage-sensitive basis, the number of units is defined as the unit of 
measurement of the usage (e.g., minutes of use or call-related database 
queries) of the element.


Sec. 51.513  Proxies for forward-looking economic cost.

    (a) A state commission may determine that the cost information 
available to it with respect to one or more elements does not support 
the adoption of a rate or rates that are consistent with the 
requirements set forth in Secs. 51.505 and 51.511. In that event, the 
state commission may establish a rate for an element that is consistent 
with the proxies specified in this section, provided that:
    (1) Any rate established through use of such proxies shall be 
superseded once the state commission has completed review of a cost 
study that complies with the forward-looking economic cost based 
pricing methodology described in Secs. 51.505 and 51.511, and has 
concluded that such study is a reasonable basis for establishing 
element rates; and
    (2) The state commission sets forth in writing a reasonable basis 
for its selection of a particular rate for the element.
    (b) The constraints on proxy-based rates described in this section 
apply on a geographically averaged basis. For purposes of determining 
whether geographically deaveraged rates for elements comply with the 
provisions of this section, a geographically averaged proxy-based rate 
shall be computed based on the weighted average of the actual, 
geographically deaveraged rates that apply in separate geographic areas 
in a state.
    (c) Proxies for specific elements.
    (1) Local loops. For each state listed below, the proxy-based 
monthly rate for unbundled local loops, on a statewide weighted average 
basis, shall be no greater than the figures listed in the table below. 
(The Commission has not established a default proxy ceiling for loop 
rates in Alaska.)

                                  Table                                 
------------------------------------------------------------------------
                                                                  Proxy 
                             State                               ceiling
------------------------------------------------------------------------
Alabama.......................................................    $17.25
Arizona.......................................................     12.85
Arkansas......................................................     21.18
California....................................................     11.10
Colorado......................................................     14.97
Connecticut...................................................     13.23
Delaware......................................................     13.24
District of Columbia..........................................     10.81
Florida.......................................................     13.68
Georgia.......................................................     16.09
Hawaii........................................................     15.27
Idaho.........................................................     20.16
Illinois......................................................     13.12
Indiana.......................................................     13.29
Iowa..........................................................     15.94
Kansas........................................................     19.85
Kentucky......................................................     16.70
Louisiana.....................................................     16.98
Maine.........................................................     18.69
Maryland......................................................     13.36
Massachusetts.................................................      9.83
Michigan......................................................     15.27
Minnesota.....................................................     14.81
Mississippi...................................................     21.97
Missouri......................................................     18.32
Montana.......................................................     25.18
Nebraska......................................................     18.05
Nevada........................................................     18.95
New Hampshire.................................................     16.00
New Jersey....................................................     12.47
New Mexico....................................................     18.66
New York......................................................     11.75
North Carolina................................................     16.71
North Dakota..................................................     25.36
Ohio..........................................................     15.73
Oklahoma......................................................     17.63
Oregon........................................................     15.44
Pennsylvania..................................................     12.30
Puerto Rico...................................................     12.47
Rhode Island..................................................     11.48
South Carolina................................................     17.07
South Dakota..................................................     25.33
Tennessee.....................................................     17.41
Texas.........................................................     15.49
Utah..........................................................     15.12
Vermont.......................................................     20.13
Virginia......................................................     14.13
Washington....................................................     13.37
West Virginia.................................................     19.25
Wisconsin.....................................................     15.94
Wyoming.......................................................     25.11
------------------------------------------------------------------------

    (2) Local switching. The blended proxy-based rate for unbundled 
local switching shall be no greater than 0.4 cents ($0.004) per minute, 
and no less than 0.2 cents ($0.002) per minute, except that, where a 
state commission has, before August 8, 1996, established a rate less 
than or equal to 0.5 cents ($0.005) per minute, that rate may be 
retained pending completion of a forward-looking economic cost study. 
The blended rate for unbundled local switching shall be calculated as 
the sum of the following:
    (i) The applicable flat-rated charges for subelements associated 
with unbundled local switching, such as line ports, divided by the 
projected average minutes of use per flat-rated subelement; and
    (ii) The applicable usage-sensitive charges for subelements 
associated with

[[Page 45630]]

unbundled local switching, such as switching and trunk ports. A 
weighted average of such charges shall be used in appropriate 
circumstances, such as when peak and off-peak charges are used.
    (3) Dedicated transmission links. The proxy-based rates for 
dedicated transmission links shall be no greater than the incumbent 
LEC's tariffed interstate charges for comparable entrance facilities or 
direct-trunked transport offerings, as described in Secs. 69.110 and 
69.112 of this chapter.
    (4) Shared transmission facilities between tandem switches and end 
offices. The proxy-based rates for shared transmission facilities 
between tandem switches and end offices shall be no greater than the 
weighted per-minute equivalent of DS1 and DS3 interoffice dedicated 
transmission link rates that reflects the relative number of DS1 and 
DS3 circuits used in the tandem to end office links (or a surrogate 
based on the proportion of copper and fiber facilities in the 
interoffice network), calculated using a loading factor of 9,000 
minutes per month per voice-grade circuit, as described in Sec. 69.112 
of this chapter.
    (5) Tandem switching. The proxy-based rate for tandem switching 
shall be no greater than 0.15 cents ($0.0015) per minute of use.
    (6) Collocation. To the extent that the incumbent LEC offers a 
comparable form of collocation in its interstate expanded 
interconnection tariffs, as described in Secs. 64.1401 and 69.121 of 
this chapter, the proxy-based rates for collocation shall be no greater 
than the effective rates for equivalent services in the interstate 
expanded interconnection tariff. To the extent that the incumbent LEC 
does not offer a comparable form of collocation in its interstate 
expanded interconnection tariffs, a state commission may, in its 
discretion, establish a proxy-based rate, provided that the state 
commission sets forth in writing a reasonable basis for concluding that 
its rate would approximate the result of a forward-looking economic 
cost study, as described in Sec. 51.505.
    (7) Signaling, call-related database, and other elements. To the 
extent that the incumbent LEC has established rates for offerings 
comparable to other elements in its interstate access tariffs, and has 
provided cost support for those rates pursuant to Sec. 61.49(h) of this 
chapter, the proxy-based rates for those elements shall be no greater 
than the effective rates for equivalent services in the interstate 
access tariffs. In other cases, the proxy-based rate shall be no 
greater than a rate based on direct costs plus a reasonable allocation 
of overhead loadings, pursuant to Sec. 61.49(h) of this chapter.


Sec. 51.515  Application of access charges.

    (a) Neither the interstate access charges described in part 69 of 
this chapter nor comparable intrastate access charges shall be assessed 
by an incumbent LEC on purchasers of elements that offer telephone 
exchange or exchange access services.
    (b) Notwithstanding Secs. 51.505, 51.511, and 51.513(d)(2) and 
paragraph (a) of this section, an incumbent LEC may assess upon 
telecommunications carriers that purchase unbundled local switching 
elements, as described in Sec. 51.319(c)(1), for interstate minutes of 
use traversing such unbundled local switching elements, the carrier 
common line charge described in Sec. 69.105 of this chapter, and a 
charge equal to 75% of the interconnection charge described in 
Sec. 69.124 of this chapter, only until the earliest of the following, 
and not thereafter:
    (1) June 30, 1997;
    (2) The later of the effective date of a final Commission decision 
in CC Docket No. 96-45, Federal-State Joint Board on Universal Service, 
or the effective date of a final Commission decision in a proceeding to 
consider reform of the interstate access charges described in part 69; 
or
    (3) With respect to a Bell operating company only, the date on 
which that company is authorized to offer in-region interLATA service 
in a state pursuant to section 271 of the Act. The end date for Bell 
operating companies that are authorized to offer interLATA service 
shall apply only to the recovery of access charges in those states in 
which the Bell operating company is authorized to offer such service.
    (c) Notwithstanding Secs. 51.505, 51.511, and 51.513(d)(2) and 
paragraph (a) of this section, an incumbent LEC may assess upon 
telecommunications carriers that purchase unbundled local switching 
elements, as described in Sec. 51.319(c)(1), for intrastate toll 
minutes of use traversing such unbundled local switching elements, 
intrastate access charges comparable to those listed in paragraph (b) 
and any explicit intrastate universal service mechanism based on access 
charges, only until the earliest of the following, and not thereafter:
    (1) June 30, 1997;
    (2) The effective date of a state commission decision that an 
incumbent LEC may not assess such charges; or
    (3) With respect to a Bell operating company only, the date on 
which that company is authorized to offer in-region interLATA service 
in the state pursuant to section 271 of the Act. The end date for Bell 
operating companies that are authorized to offer interLATA service 
shall apply only to the recovery of access charges in those states in 
which the Bell operating company is authorized to offer such service.

Subpart G--Resale


Sec. 51.601  Scope of resale rules.

    The provisions of this subpart govern the terms and conditions 
under which LECs offer telecommunications services to requesting 
telecommunications carriers for resale.


Sec. 51.603  Resale obligation of all local exchange carriers.

    (a) A LEC shall make its telecommunications services available for 
resale to requesting telecommunications carriers on terms and 
conditions that are reasonable and non-discriminatory.
    (b) A LEC must provide services to requesting telecommunications 
carriers for resale that are equal in quality, subject to the same 
conditions, and provided within the same provisioning time intervals 
that the LEC provides these services to others, including end users.


Sec. 51.605  Additional obligations of incumbent local exchange 
carriers.

    (a) An incumbent LEC shall offer to any requesting 
telecommunications carrier any telecommunications service that the 
incumbent LEC offers on a retail basis to subscribers that are not 
telecommunications carriers for resale at wholesale rates that are, at 
the election of the state commission--
    (1) Consistent with the avoided cost methodology described in 
Secs. 51.607 and 51.609; or
    (2) Interim wholesale rates, pursuant to Sec. 51.611.
    (b) Except as provided in Sec. 51.613, an incumbent LEC shall not 
impose restrictions on the resale by a requesting carrier of 
telecommunications services offered by the incumbent LEC.


Sec. 51.607  Wholesale pricing standard.

    (a) The wholesale rate that an incumbent LEC may charge for a 
telecommunications service provided for resale to other 
telecommunications carriers shall equal the incumbent LEC's existing 
retail rate for the telecommunications service, less avoided retail 
costs, as described in Sec. 51.609.
    (b) For purposes of this subpart, exchange access services, as 
defined in section 3 of the Act, shall not be considered to be 
telecommunications services that incumbent LECs must make available for 
resale at wholesale

[[Page 45631]]

rates to requesting telecommunications carriers.


Sec. 51.609  Determination of avoided retail costs.

    (a) Except as provided in Sec. 51.611, the amount of avoided retail 
costs shall be determined on the basis of a cost study that complies 
with the requirements of this section.
    (b) Avoided retail costs shall be those costs that reasonably can 
be avoided when an incumbent LEC provides a telecommunications service 
for resale at wholesale rates to a requesting carrier.
    (c) For incumbent LECs that are designated as Class A companies 
under Sec. 32.11 of this chapter, except as provided in paragraph (d) 
of this section, avoided retail costs shall:
    (1) Include, as direct costs, the costs recorded in USOA accounts 
6611 (product management), 6612 (sales), 6613 (product advertising), 
6621 (call completion services), 6622 (number services), and 6623 
(customer services) (Secs. 32.6611, 32.6612, 32.6613, 32.6621, 32.6622, 
and 32.6623 of this chapter);
    (2) Include, as indirect costs, a portion of the costs recorded in 
USOA accounts 6121-6124 (general support expenses), 6711, 6712, 6721-
6728 (corporate operations expenses), and 5301 (telecommunications 
uncollectibles) (Secs. 32.6121-32.6124, 32.6711, 32.6712, 32.6721-
32.6728, and 32.5301 of this chapter); and
    (3) Not include plant-specific expenses and plant non-specific 
expenses, other than general support expenses (Secs. 32.6110-32.6116, 
32.6210-32.6565 of this chapter).
    (d) Costs included in accounts 6611-6613 and 6621-6623 described in 
paragraph (c) of this section (Secs. 32.6611-32.6613 and 32.6621-
32.6623 of this chapter) may be included in wholesale rates only to the 
extent that the incumbent LEC proves to a state commission that 
specific costs in these accounts will be incurred and are not avoidable 
with respect to services sold at wholesale, or that specific costs in 
these accounts are not included in the retail prices of resold 
services. Costs included in accounts 6110-6116 and 6210-6565 described 
in paragraph (c) of this section (Secs. 32.6110-32.6116, 32.6210-
32.6565 of this chapter) may be treated as avoided retail costs, and 
excluded from wholesale rates, only to the extent that a party proves 
to a state commission that specific costs in these accounts can 
reasonably be avoided when an incumbent LEC provides a 
telecommunications service for resale to a requesting carrier.
    (e) For incumbent LECs that are designated as Class B companies 
under Sec. 32.11 of this chapter and that record information in summary 
accounts instead of specific USOA accounts, the entire relevant summary 
accounts may be used in lieu of the specific USOA accounts listed in 
paragraphs (c) and (d) of this section.


Sec. 51.611  Interim wholesale rates.

    (a) If a state commission cannot, based on the information 
available to it, establish a wholesale rate using the methodology 
prescribed in Sec. 51.609, then the state commission may elect to 
establish an interim wholesale rate as described in paragraph (b) of 
this section.
    (b) The state commission may establish interim wholesale rates that 
are at least 17 percent, and no more than 25 percent, below the 
incumbent LEC's existing retail rates, and shall articulate the basis 
for selecting a particular discount rate. The same discount percentage 
rate shall be used to establish interim wholesale rates for each 
telecommunications service.
    (c) A state commission that establishes interim wholesale rates 
shall, within a reasonable period of time thereafter, establish 
wholesale rates on the basis of an avoided retail cost study that 
complies with Sec. 51.609.


Sec. 51.613  Restrictions on resale.

    (a) Notwithstanding Sec. 51.605(b), the following types of 
restrictions on resale may be imposed:
    (1) Cross-class selling. A state commission may permit an incumbent 
LEC to prohibit a requesting telecommunications carrier that purchases 
at wholesale rates for resale, telecommunications services that the 
incumbent LEC makes available only to residential customers or to a 
limited class of residential customers, from offering such services to 
classes of customers that are not eligible to subscribe to such 
services from the incumbent LEC.
    (2) Short term promotions. An incumbent LEC shall apply the 
wholesale discount to the ordinary rate for a retail service rather 
than a special promotional rate only if:
    (i) Such promotions involve rates that will be in effect for no 
more than 90 days; and
    (ii) The incumbent LEC does not use such promotional offerings to 
evade the wholesale rate obligation, for example by making available a 
sequential series of 90-day promotional rates. r
    (b) With respect to any restrictions on resale not permitted under 
paragraph (a), an incumbent LEC may impose a restriction only if it 
proves to the state commission that the restriction is reasonable and 
nondiscriminatory.
    (c)  Branding. Where operator, call completion, or directory 
assistance service is part of the service or service package an 
incumbent LEC offers for resale, failure by an incumbent LEC to comply 
with reseller unbranding or rebranding requests shall constitute a 
restriction on resale.
    (1) An incumbent LEC may impose such a restriction only if it 
proves to the state commission that the restriction is reasonable and 
nondiscriminatory, such as by proving to a state commission that the 
incumbent LEC lacks the capability to comply with unbranding or 
rebranding requests.
    (2) For purposes of this subpart, unbranding or rebranding shall 
mean that operator, call completion, or directory assistance services 
are offered in such a manner that an incumbent LEC's brand name or 
other identifying information is not identified to subscribers, or that 
such services are offered in such a manner that identifies to 
subscribers the requesting carrier's brand name or other identifying 
information.


Sec. 51.615  Withdrawal of services.

    When an incumbent LEC makes a telecommunications service available 
only to a limited group of customers that have purchased such a service 
in the past, the incumbent LEC must also make such a service available 
at wholesale rates to requesting carriers to offer on a resale basis to 
the same limited group of customers that have purchased such a service 
in the past.


Sec. 51.617  Assessment of end user common line charge on resellers.

    (a) Notwithstanding the provision in Sec. 69.104(a) of this chapter 
that the end user common line charge be assessed upon end users, an 
incumbent LEC shall assess this charge, and the charge for changing the 
designated primary interexchange carrier, upon requesting carriers that 
purchase telephone exchange service for resale. The specific end user 
common line charge to be assessed will depend upon the identity of the 
end user served by the requesting carrier.
    (b) When an incumbent LEC provides telephone exchange service to a 
requesting carrier at wholesale rates for resale, the incumbent LEC 
shall continue to assess the interstate access charges provided in part 
69 of this chapter, other than the end user common line charge, upon 
interexchange carriers that use the incumbent LEC's facilities to 
provide interstate or international

[[Page 45632]]

telecommunications services to the interexchange carriers' subscribers.

Subpart H--Reciprocal Compensation for Transport and Termination of 
Local Telecommunications Traffic


Sec. 51.701  Scope of transport and termination pricing rules.

    (a) The provisions of this subpart apply to reciprocal compensation 
for transport and termination of local telecommunications traffic 
between LECs and other telecommunications carriers.
    (b) Local telecommunications traffic. For purposes of this subpart, 
local telecommunications traffic means:
    (1) Telecommunications traffic between a LEC and a 
telecommunications carrier other than a CMRS provider that originates 
and terminates within a local service area established by the state 
commission; or
    (2) Telecommunications traffic between a LEC and a CMRS provider 
that, at the beginning of the call, originates and terminates within 
the same Major Trading Area, as defined in Sec. 24.202(a) of this 
chapter.
    (c) Transport. For purposes of this subpart, transport is the 
transmission and any necessary tandem switching of local 
telecommunications traffic subject to section 251(b)(5) of the Act from 
the interconnection point between the two carriers to the terminating 
carrier's end office switch that directly serves the called party, or 
equivalent facility provided by a carrier other than an incumbent LEC.
    (d) Termination. For purposes of this subpart, termination is the 
switching of local telecommunications traffic at the terminating 
carrier's end office switch, or equivalent facility, and delivery of 
such traffic to the called party's premises.
    (e) Reciprocal compensation. For purposes of this subpart, a 
reciprocal compensation arrangement between two carriers is one in 
which each of the two carriers receives compensation from the other 
carrier for the transport and termination on each carrier's network 
facilities of local telecommunications traffic that originates on the 
network facilities of the other carrier.


Sec. 51.703  Reciprocal compensation obligation of LECs.

    (a) Each LEC shall establish reciprocal compensation arrangements 
for transport and termination of local telecommunications traffic with 
any requesting telecommunications carrier.
    (b) A LEC may not assess charges on any other telecommunications 
carrier for local telecommunications traffic that originates on the 
LEC's network.


Sec. 51.705  Incumbent LECs' rates for transport and termination.

    (a) An incumbent LEC's rates for transport and termination of local 
telecommunications traffic shall be established, at the election of the 
state commission, on the basis of:
    (1) The forward-looking economic costs of such offerings, using a 
cost study pursuant to Secs. 51.505 and 51.511;
    (2) Default proxies, as provided in Sec. 51.707; or
    (3) A bill-and-keep arrangement, as provided in Sec. 51.713.
    (b) In cases where both carriers in a reciprocal compensation 
arrangement are incumbent LECs, state commissions shall establish the 
rates of the smaller carrier on the basis of the larger carrier's 
forward-looking costs, pursuant to Sec. 51.711.


Sec. 51.707  Default proxies for incumbent LECs' transport and 
termination rates.

    (a) A state commission may determine that the cost information 
available to it with respect to transport and termination of local 
telecommunications traffic does not support the adoption of a rate or 
rates for an incumbent LEC that are consistent with the requirements of 
Secs. 51.505 and 51.511. In that event, the state commission may 
establish rates for transport and termination of local 
telecommunications traffic, or for specific components included 
therein, that are consistent with the proxies specified in this 
section, provided that:
    (1) Any rate established through use of such proxies is superseded 
once that state commission establishes rates for transport and 
termination pursuant to Secs. 51.705(a)(1) or 51.705(a)(3); and
    (2) The state commission sets forth in writing a reasonable basis 
for its selection of a particular proxy for transport and termination 
of local telecommunications traffic, or for specific components 
included within transport and termination.
    (b) If a state commission establishes rates for transport and 
termination of local telecommunications traffic on the basis of default 
proxies, such rates must meet the following requirements:
    (1) Termination. The incumbent LEC's rates for the termination of 
local telecommunications traffic shall be no greater than 0.4 cents 
($0.004) per minute, and no less than 0.2 cents ($0.002) per minute, 
except that, if a state commission has, before August 8, 1996, 
established a rate less than or equal to 0.5 cents ($0.005) per minute 
for such calls, that rate may be retained pending completion of a 
forward-looking economic cost study.
    (2) Transport. The incumbent LEC's rates for the transport of local 
telecommunications traffic, under this section, shall comply with the 
proxies described in Sec. 51.513(d) (3), (4), and (5) that apply to the 
analogous unbundled network elements used in transporting a call to the 
end office that serves the called party.


Sec. 51.709  Rate structure for transport and termination.

    (a) In state proceedings, a state commission shall establish rates 
for the transport and termination of local telecommunications traffic 
that are structured consistently with the manner that carriers incur 
those costs, and consistently with the principles in Secs. 51.507 and 
51.509.
    (b) The rate of a carrier providing transmission facilities 
dedicated to the transmission of traffic between two carriers' networks 
shall recover only the costs of the proportion of that trunk capacity 
used by an interconnecting carrier to send traffic that will terminate 
on the providing carrier's network. Such proportions may be measured 
during peak periods.


Sec. 51.711  Symmetrical reciprocal compensation.

    (a) Rates for transport and termination of local telecommunications 
traffic shall be symmetrical, except as provided in paragraphs (b) and 
(c) of this section.
    (1) For purposes of this subpart, symmetrical rates are rates that 
a carrier other than an incumbent LEC assesses upon an incumbent LEC 
for transport and termination of local telecommunications traffic equal 
to those that the incumbent LEC assesses upon the other carrier for the 
same services.
    (2) In cases where both parties are incumbent LECs, or neither 
party is an incumbent LEC, a state commission shall establish the 
symmetrical rates for transport and termination based on the larger 
carrier's forward-looking costs.
    (3) Where the switch of a carrier other than an incumbent LEC 
serves a geographic area comparable to the area served by the incumbent 
LEC's tandem switch, the appropriate rate for the carrier other than an 
incumbent LEC is the incumbent LEC's tandem interconnection rate.
    (b) A state commission may establish asymmetrical rates for 
transport and termination of local telecommunications traffic only if 
the carrier other than the incumbent LEC (or the smaller of two 
incumbent LECs) proves to the state commission on the basis of a cost 
study using the forward-looking economic cost based pricing methodology 
described in Secs. 51.505 and 51.511, that the forward-looking costs 
for a network

[[Page 45633]]

efficiently configured and operated by the carrier other than the 
incumbent LEC (or the smaller of two incumbent LECs), exceed the costs 
incurred by the incumbent LEC (or the larger incumbent LEC), and, 
consequently, that such that a higher rate is justified.
    (c) Pending further proceedings before the Commission, a state 
commission shall establish the rates that licensees in the Paging and 
Radiotelephone Service (defined in part 22, subpart E of this chapter), 
Narrowband Personal Communications Services (defined in part 24, 
subpart D of this chapter), and Paging Operations in the Private Land 
Mobile Radio Services (defined in part 90, subpart P of this chapter) 
may assess upon other carriers for the transport and termination of 
local telecommunications traffic based on the forward-looking costs 
that such licensees incur in providing such services, pursuant to 
Secs. 51.505 and 51.511. Such licensees' rates shall not be set based 
on the default proxies described in Sec. 51.707.


Sec. 51.713  Bill-and-keep arrangements for reciprocal compensation.

    (a) For purposes of this subpart, bill-and-keep arrangements are 
those in which neither of the two interconnecting carriers charges the 
other for the termination of local telecommunications traffic that 
originates on the other carrier's network.
    (b) A state commission may impose bill-and-keep arrangements if the 
state commission determines that the amount of local telecommunications 
traffic from one network to the other is roughly balanced with the 
amount of local telecommunications traffic flowing in the opposite 
direction, and is expected to remain so, and no showing has been made 
pursuant to Sec. 51.711(b).
    (c) Nothing in this section precludes a state commission from 
presuming that the amount of local telecommunications traffic from one 
network to the other is roughly balanced with the amount of local 
telecommunications traffic flowing in the opposite direction and is 
expected to remain so, unless a party rebuts such a presumption.


Sec. 51.715  Interim transport and termination pricing.

    (a) Upon request from a telecommunications carrier without an 
existing interconnection arrangement with an incumbent LEC, the 
incumbent LEC shall provide transport and termination of local 
telecommunications traffic immediately under an interim arrangement, 
pending resolution of negotiation or arbitration regarding transport 
and termination rates and approval of such rates by a state commission 
under sections 251 and 252 of the Act.
    (1) This requirement shall not apply when the requesting carrier 
has an existing interconnection arrangement that provides for the 
transport and termination of local telecommunications traffic by the 
incumbent LEC.
    (2) A telecommunications carrier may take advantage of such an 
interim arrangement only after it has requested negotiation with the 
incumbent LEC pursuant to Sec. 51.301.
    (b) Upon receipt of a request as described in paragraph (a) of this 
section, an incumbent LEC must, without unreasonable delay, establish 
an interim arrangement for transport and termination of local 
telecommunications traffic at symmetrical rates.
    (1) In a state in which the state commission has established 
transport and termination rates based on forward-looking economic cost 
studies, an incumbent LEC shall use these state-determined rates as 
interim transport and termination rates.
    (2) In a state in which the state commission has established 
transport and termination rates consistent with the default price 
ranges and ceilings described in Sec. 51.707, an incumbent LEC shall 
use these state-determined rates as interim rates.
    (3) In a state in which the state commission has neither 
established transport and termination rates based on forward-looking 
economic cost studies nor established transport and termination rates 
consistent with the default price ranges described in Sec. 51.707, an 
incumbent LEC shall set interim transport and termination rates at the 
default ceilings for end-office switching (0.4 cents per minute of 
use), tandem switching (0.15 cents per minute of use), and transport 
(as described in Sec. 51.707(b)(2)).
    (c) An interim arrangement shall cease to be in effect when one of 
the following occurs with respect to rates for transport and 
termination of local telecommunications traffic subject to the interim 
arrangement:
    (1) A voluntary agreement has been negotiated and approved by a 
state commission;
    (2) An agreement has been arbitrated and approved by a state 
commission; or
    (3) The period for requesting arbitration has passed with no such 
request.
    (d) If the rates for transport and termination of local 
telecommunications traffic in an interim arrangement differ from the 
rates established by a state commission pursuant to Sec. 51.705, the 
state commission shall require carriers to make adjustments to past 
compensation. Such adjustments to past compensation shall allow each 
carrier to receive the level of compensation it would have received had 
the rates in the interim arrangement equalled the rates later 
established by the state commission pursuant to Sec. 51.705.


Sec. 51.717  Renegotiation of existing non-reciprocal arrangements.

    (a) Any CMRS provider that operates under an arrangement with an 
incumbent LEC that was established before August 8, 1996 and that 
provides for non-reciprocal compensation for transport and termination 
of local telecommunications traffic is entitled to renegotiate these 
arrangements with no termination liability or other contract penalties.
    (b) From the date that a CMRS provider makes a request under 
paragraph (a) of this section until a new agreement has been either 
arbitrated or negotiated and has been approved by a state commission, 
the CMRS provider shall be entitled to assess upon the incumbent LEC 
the same rates for the transport and termination of local 
telecommunications traffic that the incumbent LEC assesses upon the 
CMRS provider pursuant to the pre-existing arrangement.

Subpart I--Procedures for Implementation of Section 252 of the Act


Sec. 51.801  Commission action upon a state commission's failure to act 
to carry out its responsibility under section 252 of the Act.

    (a) If a state commission fails to act to carry out its 
responsibility under section 252 of the Act in any proceeding or other 
matter under section 252 of the Act, the Commission shall issue an 
order preempting the state commission's jurisdiction of that proceeding 
or matter within 90 days after being notified (or taking notice) of 
such failure, and shall assume the responsibility of the state 
commission under section 252 of the Act with respect to the proceeding 
or matter and shall act for the state commission.
    (b) For purposes of this part, a state commission fails to act if 
the state commission fails to respond, within a reasonable time, to a 
request for mediation, as provided for in section 252(a)(2) of the Act, 
or for a request for arbitration, as provided for in section 252(b) of 
the Act, or fails to complete an arbitration within the time limits 
established in section 252(b)(4)(C) of the Act.
    (c) A state shall not be deemed to have failed to act for purposes 
of section 252(e)(5) of the Act if an agreement is

[[Page 45634]]

deemed approved under section 252(e)(4) of the Act.


Sec. 51.803  Procedures for Commission notification of a state 
commission's failure to act.

    (a) Any party seeking preemption of a state commission's 
jurisdiction, based on the state commission's failure to act, shall 
notify the Commission in accordance with following procedures:
    (1) Such party shall file with the Secretary of the Commission a 
petition, supported by an affidavit, that states with specificity the 
basis for the petition and any information that supports the claim that 
the state has failed to act, including, but not limited to, the 
applicable provisions of the Act and the factual circumstances 
supporting a finding that the state commission has failed to act;
    (2) Such party shall ensure that the state commission and the other 
parties to the proceeding or matter for which preemption is sought are 
served with the petition required in paragraph (a)(1) of this section 
on the same date that the petitioning party serves the petition on the 
Commission; and
    (3) Within fifteen days from the date of service of the petition 
required in paragraph (a)(1) of this section, the applicable state 
commission and parties to the proceeding may file with the Commission a 
response to the petition.
    (b) The party seeking preemption must prove that the state has 
failed to act to carry out its responsibilities under section 252 of 
the Act.
    (c) The Commission, pursuant to section 252(e)(5) of the Act, may 
take notice upon its own motion that a state commission has failed to 
act. In such a case, the Commission shall issue a public notice that 
the Commission has taken notice of a state commission's failure to act. 
The applicable state commission and the parties to a proceeding or 
matter in which the Commission has taken notice of the state 
commission's failure to act may file, within fifteen days of the 
issuance of the public notice, comments on whether the Commission is 
required to assume the responsibility of the state commission under 
section 252 of the Act with respect to the proceeding or matter.
    (d) The Commission shall issue an order determining whether it is 
required to preempt the state commission's jurisdiction of a proceeding 
or matter within 90 days after being notified under paragraph (a) of 
this section or taking notice under paragraph (c) of this section of a 
state commission's failure to carry out its responsibilities under 
section 252 of the Act.


Sec. 51.805  The Commission's authority over proceedings and matters.

    (a) If the Commission assumes responsibility for a proceeding or 
matter pursuant to section 252(e)(5) of the Act, the Commission shall 
retain jurisdiction over such proceeding or matter. At a minimum, the 
Commission shall approve or reject any interconnection agreement 
adopted by negotiation, mediation or arbitration for which the 
Commission, pursuant to section 252(e)(5) of the Act, has assumed the 
state's commission's responsibilities.
    (b) Agreements reached pursuant to mediation or arbitration by the 
Commission pursuant to section 252(e)(5) of the Act are not required to 
be submitted to the state commission for approval or rejection.


Sec. 51.807  Arbitration and mediation of agreements by the Commission 
pursuant to section 252(e)(5) of the Act.

    (a) The rules established in this section shall apply only to 
instances in which the Commission assumes jurisdiction under section 
252(e)(5) of the Act.
    (b) When the Commission assumes responsibility for a proceeding or 
matter pursuant to section 252(e)(5) of the Act, it shall not be bound 
by state laws and standards that would have applied to the state 
commission in such proceeding or matter.
    (c) In resolving, by arbitration under section 252(b) of the Act, 
any open issues and in imposing conditions upon the parties to the 
agreement, the Commission shall:
    (1) Ensure that such resolution and conditions meet the 
requirements of section 251 of the Act, including the rules prescribed 
by the Commission pursuant to that section;
    (2) Establish any rates for interconnection, services, or network 
elements according to section 252(d) of the Act, including the rules 
prescribed by the Commission pursuant to that section; and
    (3) Provide a schedule for implementation of the terms and 
conditions by the parties to the agreement.
    (d) An arbitrator, acting pursuant to the Commission's authority 
under section 252(e)(5) of the Act, shall use final offer arbitration, 
except as otherwise provided in this section:
    (1) At the discretion of the arbitrator, final offer arbitration 
may take the form of either entire package final offer arbitration or 
issue-by-issue final offer arbitration.
    (2) Negotiations among the parties may continue, with or without 
the assistance of the arbitrator, after final arbitration offers are 
submitted. Parties may submit subsequent final offers following such 
negotiations.
    (3) To provide an opportunity for final post-offer negotiations, 
the arbitrator will not issue a decision for at least fifteen days 
after submission to the arbitrator of the final offers by the parties.
    (e) Final offers submitted by the parties to the arbitrator shall 
be consistent with section 251 of the Act, including the rules 
prescribed by the Commission pursuant to that section.
    (f) Each final offer shall:
    (1) Meet the requirements of section 251, including the rules 
prescribed by the Commission pursuant to that section;
    (2) Establish rates for interconnection, services, or access to 
unbundled network elements according to section 252(d) of the Act, 
including the rules prescribed by the Commission pursuant to that 
section; and
    (3) Provide a schedule for implementation of the terms and 
conditions by the parties to the agreement. If a final offer submitted 
by one or more parties fails to comply with the requirements of this 
section, the arbitrator has discretion to take steps designed to result 
in an arbitrated agreement that satisfies the requirements of section 
252(c) of the Act, including requiring parties to submit new final 
offers within a time frame specified by the arbitrator, or adopting a 
result not submitted by any party that is consistent with the 
requirements of section 252(c) of the Act, and the rules prescribed by 
the Commission pursuant to that section.
    (g) Participation in the arbitration proceeding will be limited to 
the requesting telecommunications carrier and the incumbent LEC, except 
that the Commission will consider requests by third parties to file 
written pleadings.
    (h) Absent mutual consent of the parties to change any terms and 
conditions adopted by the arbitrator, the decision of the arbitrator 
shall be binding on the parties.


Sec. 51.809  Availability of provisions of agreements to other 
telecommunications carriers under section 252(i) of the Act.

    (a) An incumbent LEC shall make available without unreasonable 
delay to any requesting telecommunications carrier any individual 
interconnection, service, or network element arrangement contained in 
any agreement to which it is a party that is approved by a state 
commission pursuant to section 252 of the Act, upon the same rates, 
terms, and conditions as those provided in the agreement. An

[[Page 45635]]

incumbent LEC may not limit the availability of any individual 
interconnection, service, or network element only to those requesting 
carriers serving a comparable class of subscribers or providing the 
same service (i.e., local, access, or interexchange) as the original 
party to the agreement.
    (b) The obligations of paragraph (a) of this section shall not 
apply where the incumbent LEC proves to the state commission that:
    (1) The costs of providing a particular interconnection, service, 
or element to the requesting telecommunications carrier are greater 
than the costs of providing it to the telecommunications carrier that 
originally negotiated the agreement, or
    (2) The provision of a particular interconnection, service, or 
element to the requesting carrier is not technically feasible.
    (c) Individual interconnection, service, or network element 
arrangements shall remain available for use by telecommunications 
carriers pursuant to this section for a reasonable period of time after 
the approved agreement is available for public inspection under section 
252(f) of the Act.

PART 90--PRIVATE LAND MOBILE RADIO SERVICES

    11. The authority citation for Part 90 is revised to read as 
follows:

    Authority: Secs. 4, 251-2, 303, 309, and 332, 48 Stat. 1066, 
1082, as amended; 47 U.S.C. 154, 251-2, 303, 309 and 332, unless 
otherwise noted.

    12. Section 90.5 is amended by redesignating paragraphs (k) and (l) 
as paragraphs (l) and (m), and adding new paragraph (k) to read as 
follows:


Sec. 90.5  Other applicable rule parts.

* * * * *
    (k) Part 51 contains rules relating to interconnection.
* * * * *
    This Attachment A will not be published in the Code of Federal 
Regulations

Attachment A

List of Commenters in CC Docket No. 96-98

360 deg. Communications Company (360 Communications)
Ad Hoc Coalition of Corporate Telecommunications Managers
Ad Hoc Telecommunications Users Committee
AirTouch Communications, Inc. (AirTouch)
Alabama Public Service Commission (Alabama Commission)
Alaska Telephone Association (Alaska Tel. Ass'n)
Alaska Public Utilities Commission (Alaska Commission)
Alliance for Public Technology
Allied Association Partners, LP & Geld Information Systems (Allied 
Ass'n)
ALLTEL Telephone Services Corporation (ALLTEL)
American Communications Services, Inc. (ACSI)
American Foundation for the Blind
American Mobile Telecommunications Association, Inc. (American 
Mobile Telecomm. Ass'n)
American Network Exchange, Inc. & U.S. Long Distance, Inc. (American 
Network Exchange)
American Personal Communications
American Petroleum Institute
American Public Communications Council
American Public Power Association (APPA)
America's Carriers Telecommunication Association (ACTA)
Ameritech
Anchorage Telephone Utility (Anchorage Tel. Utility)
Arch Communications Group, Inc. (Arch)
Arizona Corporation Commission (Arizona Commission)
Association for Study of Afro-American Life and History, Inc. 
(ASALH)
Association for Local Telecommunications Services (ALTS)
Association of Telemessaging Services International
AT&T Corp. (AT&T)
Attorneys General of Connecticut, Delaware, Illinois, Iowa, 
Massachusetts, Michigan, Minnesota, Missouri, New York, North 
Dakota, Pennsylvania, West Virginia and Wisconsin (Attorneys 
General)
Bay Springs Telephone Co., Crockett Telephone Co., National 
Telephone Company of Alabama, Peoples Telephone Company, Roanoke 
Telephone Co. & West Tennessee Telephone Company (Bay Springs, et 
al.)
Black Data Processing Associates
Black Data Processors Association (Black Data Processors Ass'n)
Bell Atlantic Telephone Companies (Bell Atlantic)
Bell Atlantic NYNEX Mobile, Inc. (Bell Atlantic NYNEX Mobile)
BellSouth Corporation, Bell Enterprises, Inc., BellSouth 
Telecommunications, Inc. (BellSouth)
Bogue, Kansas
Buckeye Cablevision, Inc. (Buckeye Cablevision)
Cable & Wireless, Inc. (Cable & Wireless)
Cellular Telecommunications Industry Association (CTIA)
Celpage, Inc. (Celpage)
Centennial Cellular Corp.
Chrysler Minority Dealers Association (Chrysler Minority Dealers 
Ass'n)
Cincinnati Bell Telephone Company (Cincinnati Bell)
Citizens Utilities Company (Citizens Utilities)
Classic Telephone, Inc. (Classic Tel.)
Colorado Independent Telephone Association (Colorado Independent 
Tel. Ass'n)
Colorado Public Utilities Commission (Colorado Commission)
COMAV, Corp. (COMAV)
Comcast Cellular Communications, Inc. (Comcast Cellular)
Comcast Corporation (Comcast)
Communications and Energy Dispute Resolution Associates (CEDRA)
Competition Policy Institute
Competitive Telecommunications Association (CompTel)
Connecticut Department of Public Utility Control (Connecticut 
Commission)
Consumer Federation of America & Consumers Union (CFA/CU)
Consumer Project on Technology on Interconnection & Unbundling 
(Consumer Project)
Continental Cablevision, Inc. (Continental)
Cox Communications, Inc. (Cox)
Defense, Secretary of
DeSoto County, Mississippi Economic Development Council
District of Columbia Public Service Commission (District of Columbia 
Commission)
Economides, Nicholas (N. Economides)
Ericsson Corporation, The (Ericsson)
Excel Telecommunications, Inc. (Excel)
Florida Public Service Commission (Florida Commission)
Fred Williamson & Associates, Inc. (F. Williamson)
Frontier Corporation (Frontier)
General Communication, Inc. (GCI)
General Services Administration/Department of Defense (GSA/DOD)
Georgia Public Service Commission (Georgia Commission)
Greater Washington Urban League
GST Telecom, Inc. (GST)
GTE Service Corporation (GTE)
Guam Telephone Authority
GVNW Inc./Management (GVNW)
Hart Engineers/Robert A. Hart, IV (Hart Engineers)
Hawaii Public Utilities Commission (Hawaii Commission)
Home Telephone Company, Inc. (Home Tel.)
Hyperion Telecommunications, Inc. (Hyperion)
Idaho Public Utilities Commission (Idaho Commission)
Illinois Commerce Commission (Illinois Commission)
Illinois Independent Telephone Association (Illinois Ind. Tel. 
Ass'n)
Independent Cable & Telecommunications Association (Ind. Cable & 
Telecomm. Ass'n)
Independent Data Communications Manufacturers Association (IDCMA)
Indiana Utility Regulatory Commission Staff (Indiana Commission 
Staff)
Information Technology Industry Council (ITIC)
Intelcom Group (U.S.A.), Inc. (Intelcom)
Intermedia Communications, Inc. (Intermedia)
International Communications Association (Intl. Comm. Ass'n)
Iowa Utilities Board (Iowa Commission)
John Staurulakis, Inc. (J. Staurulakis)
Joint Consumer Advocates
Jones Intercable, Inc. (Jones Intercable)
Justice, U. S. Department of (DoJ)
Kansas Corporation Commission (Kansas Commission)

[[Page 45636]]

Kentucky Public Service Commission (Kentucky Commission)
Koch, Richard N. (R. Koch)
LCI International Telecom Corp. (LCI)
LDDS Worldcom (LDDS)
Lincoln Telephone & Telegraph Company (Lincoln Tel.)
Louisiana Public Service Commission (Louisiana Commission)
Lucent Technologies, Inc. (Lucent)
Margaretville Telephone Co., Inc. (Margaretville Tel.)
Maryland Public Service Commission (Maryland Commission)
Massachusetts Assistive Technology Partnership Center World 
Institute on Disability, Alliance for Technology Access, Trace 
Research and Development Center, CPB/WGBH National Center For 
Accessible Media (Mass. Assistive Tech. Partnership, et al.)
Massachusetts, Commonwealth of Department of Public Utilities (Mass. 
Commission)
Massachusetts, Commonwealth of, Office of Attorney General (Mass. 
Attorney General)
Matanuska Telephone Association, Inc. (Matanuska Tel.)
MCI
Metricom, Inc. (Metricom)
MFS
Michigan Exchange Carriers Association (MECA)
Michigan, Illinois, and Texas Communities, et al.
Michigan Public Service Commission Staff (Michigan Commission Staff)
Minnesota Independent Coalition (Minnesota Independent Coalition)
Minnesota Public Utilities Commission (Minnesota Commission)
Missouri Public Service Commission (Missouri Commission)
Missouri Public Service Commissioner, Harold Crumpton (Missouri 
Commissioner)
Mobilemedia Communications, Inc. (Mobilemedia)
Motorola Satellite Communications, Inc. and U.S. Leo Services, Inc. 
(Motorola)
Municipal Utilities
National Association of the Deaf
National Association of Development Organizations, Gray Panthers, 
United Seniors Health Cooperative, United Homeowners Association, 
National Hispanic Council on Aging, National Trust/Trustnet, 
National Association of Commissions for Women, National Council of 
Senior Citizens (NADO, et al.)
National Association of Regulatory Utility Commissioners (NARUC)
National Association of State Utility Consumer Advocates (National 
Ass'n of State Utility Advocates)
National Bar Association (National Bar Ass'n)
National Cable Television Association, Inc. (NCTA)
National Exchange Carrier Association, Inc. (NECA)
National League of Cities & National Association of 
Telecommunications Officers and Advisors (NLC/NATOA)
National Private Telecommunications Association
National Telecommunications & Information Administration (NTIA)
National Wireless Resellers Association (National Wireless Resellers 
Ass'n)
Nebraska Rural Development Commission
Network Reliability Council, Secretariat of Second (Network 
Reliability Council)
New Hampshire Public Utilities Commission, New Mexico State 
Corporation Commission, Utah Division of Public Utilities, Vermont 
Public Service Board, and Vermont Department of Public Service (New 
Hampshire Commission, et al.)
New Jersey Cable Telecommunications Association, South Carolina 
Cable Television Association & Texas Cable Telecommunications 
Association (New Jersey Cable Ass'n, et al.)
New Jersey, Staff of Board of Public Utilities (New Jersey 
Commission Staff)
New York State Consumer Protection Board (New York Consumer 
Protection Board)
New York State Department of Public Service (New York Commission)
Nextel Communications, Inc. (Nextel)
NEXTLINK Communications, L.L.C. (NEXTLINK)
North Carolina Utility Commission Public Staff (North Carolina 
Commission Staff)
North Dakota Public Service Commission (North Dakota Commission)
Northern Telecom, Inc. (Nortel)
NYNEX Telephone Companies (NYNEX)
Ohio Public Utilities Commission (Ohio Commission)
Office of the Ohio Consumers' Counsel (Ohio Consumers' Counsel)
Oklahoma Corporation Commission (Oklahoma Commission)
Omnipoint Corporation (Omnipoint)
Optel, Inc. (Optel)
Oregon Public Utility Commission (Oregon Commission)
Pacific Telesis Group (PacTel)
Paging Network, Inc. (PageNet)
Pennsylvania Public Utility Commission (Pennsylvania Commission)
People of the State of California and the Public Utility Commission 
of the State of California (California Commission)
Personal Communications Industry Association (PCIA)
ProNet Inc. (ProNet)
Puerto Rico Telephone Company (Puerto Rico Tel.)
Roseville Telephone Company (Roseville Tel.)
Rural Telephone Coalition (Rural Tel. Coalition)
SBC Communications Inc. (SBC)
Scherers Communications Group, Inc. (SCG)
Small Business Administration, U.S. (SBA)
Small Cable Business Association (SCBA)
SDN Users Association
South Carolina Public Service Commission (South Carolina Commission)
Southern New England Telephone Company (SNET)
Southwestern Bell Telephone Company (SWBT)
Sprint Corporation (Sprint)
Sprint Spectrum & American Personal Communications (Sprint/APC)
State of Maine Public Utilities Commission, State of Montana Public 
Service Commission, State of Nebraska Public Service Commission, 
State of New Hampshire Public Utilities Commission, State of New 
Mexico State Corporation Commission, State of Utah Public Service 
Commission and Division of Public Utilities, State of Vermont 
Department of Public Service and Public Service Board, and Public 
Utilities Commission of South Dakota (Maine Commission, et al.)
TCA, Inc. (TCA)
TDS Telecommunications Corporation (TDS)
Telecommunication Industries Analysis Project
Telecommunications Carriers for Competition (TCC)
Tele-Communications, Inc. (TCI)
Telecommunications Industry Association (TIA)
Telecommunications Ratepayers Association for Cost-Based and 
Equitable Rates (TRACER)
Telecommunications Resellers Association (Telecomm. Resellers Ass'n)
Telefonica Larga Distancia de Puerto Rico, Inc. (TLD)
Teleport Communications Group, Inc. (Teleport)
Texas Office of Public Utility Counsel (Texas Public Utility 
Counsel)
Texas, Public Utilities Commission (Texas Commission)
Texas Statewide Telephone Cooperative, Inc.
Texas Telephone Association (Texas Tel. Ass'n)
Time Warner Communications Holdings, Inc. (Time Warner)
Unicom, Inc. (Unicom)
United Calling Network, Inc. (United Calling Network)
United Cerebral Palsy Association
United States Telephone Association (USTA)
USTN Services, Inc. (USTN)
U.S. Network Corporation (U.S. Network)
U S West, Inc. (U S West)
Utah Division of Public Utilities
UTC
Utilex, Inc. (Utilex)
Vanguard Cellular Systems, Inc. (Vanguard)
Vartec Telecom, Inc., Transtel, Telephone Express, CGI, & 
CommuniGroup Inc. of Mississippi (Vartec, et al.)
Virginia State Corporation Commission Staff (Virginia Commission 
Staff)
Washington Independent Telephone Association (Wash. Ind. Tel. Ass'n)
Washington Utilities and Transportation Commission (Washington 
Commission)
Western Alliance
WinStar Communications, Inc. (WinStar)
Wisconsin, Public Service Commission (Wisconsin Commission)
Wyoming Public Service Commission (Wyoming Commission)

List of Commenters in CC Docket No. 95-185

360 Degree Communications Co. (360 Degrees)
AirTouch Communications, Inc. (Airtouch)
Alaska 3 Cellular Corporation (Alaska CellularOne)
Alaska Telephone Association (ATA)
Alliance of Wireless Service Providers (Alliance)
Allied Personal Communications Industry Association of California 
(Allied)
ALLTEL Corporation (ALLTEL)
American Mobil Telecommunications Association (AMTA)

[[Page 45637]]

America's Carriers Telecommunications Association (ACTA)
American Personal Communications/Sprint Spectrum (APC/Sprint)
Ameritech
Anchorage Telephone Utility (ATU)
Arch Communications Group, Inc. (Arch)
AT&T Corporation (AT&T)
Bell Atlantic
Bell Atlantic Nynex Mobile (Bell Atlantic-NYNEX)
BellSouth Corporation (BellSouth)
State of California & the Public Utilities Commission (CPUC)
Cellular Communications of Puerto Rico, Inc. (CCPR)
Cellular Mobile Systems of St. Cloud G.P. (CMS)
Cellular Resellers Association (Cellular Resellers)
Cellular Telecommunications Industry Association (CTIA)
Celpage, Inc. (Celpage)
Centennial Cellular Corporation (Centennial)
Century Cellunet, Inc. (Century Cellunet)
Cincinnati Bell
CMT Partners (CMT)
Comcast Corporation (Comcast)
Competitive Telecommunications Association (CompTel)
Concord Telephone Company (Concord)
Connecticut Department of Public Utility (Connecticut)
Cox Enterprises, Inc. (Cox)
Florida Cellular RSA L.P. (Florida Cellular)
Frontier Corporation (Frontier)
GO Communications Corp. (GO)
General Services Administration (GSA)
GTE Services Corporation (GTE)
GVNW Inc., Management (GVNW)
Hart Engineers and 21st Century Telesis, Inc. (Hart Engineers)
Home Telephone Company, Inc. (HomeTel)
ICO Global Communications (ICO)
Illinois Commerce Commission (Illinois)
Illinois Independent Telephone Association (Illinois Ind. Tel. 
Assoc.)
Illinois Telephone Association (Illinois Telephone Assoc.)
John Staurulakis, Inc. (JSI)
LDDS WorldCom (LDDS WorldCom)
MCI Telecommunications Corp. (MCI)
MFS Communications Company, Inc. (MFS)
Mercury Cellular & Paging (Mercury)
Mountain Solutions
National Association of Regulatory Utility Commissioners (NARUC)
National Exchange Carrier Association (NECA)
National Telephone Cooperative Association (NTCA)
New Par
New York State Department of Public Service (New York)
Nextel Communications, Inc. (Nextel)
North Carolina 4 Cellular L.P. (North Carolina Cellular)
NYNEX Telephone Companies (NYNEX)
Public Utilities Commission of Ohio (Ohio)
Omnipoint Corporation (Omnipoint)
OPASTCO
Pacific Bell, Pacific Bell Mobile Services, Nevada Bell (Pacific 
Bell)
Paging Network, Inc. (PageNet)
Personal Communications Industry Association (PCIA)
Point Communications Company (Point)
Poka Lambro Telephone Cooperative (Poka Lambro)
Puerto Rico Telephone Company (PRTC)
Rural Cellular Association (RCA)
Rural Cellular Corporation (RCC)
SBC Communications, Inc. (SBC)
Smithville Telephone Company (Smithville)
Southeast Telephone Company (Southeast Telephone)
Sprint Corporation (Sprint)
Sprint Spectrum and American Personal Communications (Sprint/APC)
Telecommunications Resellers Association (TRA)
Teleport Communications Group (Teleport)
Time Warner Communications Holdings, Inc. (Time Warner)
Telecommunications Ratepayers Association for Cost-Based and 
Equitable Rates (TRACER)
Union Telephone Company (Union)
United States Telephone Association (USTA)
US West, Inc. (US West)
Vanguard Cellular Systems, Inc. (Vanguard)
Western Radio Services Co., Inc. (Western)
Western Wireless Corporation (Western Wireless)
Westlink Company (Westlink)
List of Commenters in CC Docket No. 91-346

List of Commenters in CC Docket No. 91-346

Ad Hoc Telecommunications Users Committee (Ad Hoc)
Allnet Communication Services, Inc. (Allnet)
American Telephone and Telegraph Company (AT&T)
Ameritech Operating Companies (Ameritech)
Bell Atlantic Telephone Companies (Bell Atlantic)
BellSouth Corporation (BellSouth)
Cincinnati Bell Telephone (Cincinnati Bell)
Ericsson Corporation (Ericsson)
General Services Administration (GSA)
Geonet
GTE Service Corporation (GTE)
Information Technology Association of America (ITAA)
Joint Filers (includes Bell Atlantic, BellSouth, GTE, Lincoln, 
Pacific Bell, Rochester, SNET, and US WEST)
MCI Telecommunications Corporation (MCI)
National Communications System (NCS)
Nextel Communications, Inc. (Nextel)
North American Telecommunications Association (NATA)
Northern Telecom Inc. (Northern Telecom)
NYNEX Telephone Companies (NYNEX)
Pacific Bell and Nevada Bell (Pacific Bell)
Pacific Telesis Corporation (Pactel)
Services-oriented Open Network Technologies, Inc. (SONetech)
Siemens Stromberg-Carlson (Siemens)
Southern New England Telephone Company (SNET)
Southwestern Bell Corporation (SWBT)
Sprint
Telecommunications Industry Association (TIA)
Teleport Communications Group (Teleport)
Teloquent Communications Corporation (Teloquent)
United and Central Telephone Companies (United and Central)
United States Telephone Association (USTA)
US WEST Communications, Inc. (US WEST)

    This Attachment B will not be published in the Code of Federal 
Regulations.

         Attachment B.--State Proxy Ceilings for the Local Loop         
------------------------------------------------------------------------
                                                                  Proxy 
                             State                               ceiling
------------------------------------------------------------------------
Alabama.......................................................    $17.25
Arizona.......................................................     12.85
Arkansas......................................................     21.18
California....................................................     11.10
Colorado......................................................     14.97
Connecticut...................................................     13.23
Delaware......................................................     13.24
District of Columbia..........................................     10.81
Florida.......................................................     13.68
Georgia.......................................................     16.09
Hawaii........................................................     15.27
Idaho.........................................................     20.16
Illinois......................................................     13.12
Indiana.......................................................     13.29
Iowa..........................................................     15.94
Kansas........................................................     19.85
Kentucky......................................................     16.70
Louisiana.....................................................     16.98
Maine.........................................................     18.69
Maryland......................................................     13.36
Massachusetts.................................................      9.83
Michigan......................................................     15.27
Minnesota.....................................................     14.81
Mississippi...................................................     21.97
Missouri......................................................     18.32
Montana.......................................................     25.18
Nebraska......................................................     18.05
Nevada........................................................     18.95
New Hampshire.................................................     16.00
New Jersey....................................................     12.47
New Mexico....................................................     18.66
New York......................................................     11.75
North Carolina................................................     16.71
North Dakota..................................................     25.36
Ohio..........................................................     15.73
Oklahoma......................................................     17.63
Oregon........................................................     15.44
Pennsylvania..................................................     12.30
Puerto Rico...................................................     12.47
Rhode Island..................................................     11.48
South Carolina................................................     17.07
South Dakota..................................................     25.33
Tennessee.....................................................     17.41
Texas.........................................................     15.49
Utah..........................................................     15.12
Vermont.......................................................     20.13
Virginia......................................................     14.13
Washington....................................................     13.37
West Virginia.................................................     19.25
Wisconsin.....................................................     15.94
Wyoming.......................................................     25.11
------------------------------------------------------------------------

[FR Doc. 96-21589 Filed 8-28-96; 8:45 am]
BILLING CODE 6712-01-P